TPR Issues Guidance for UK Defined Contribution Plans

New laws that incorporate ESG requirements take effect in October.

UK workplace pension watchdog The Pensions Regulator (TPR) has released its updated investment guidance for defined contribution pension plans, which incorporates new laws that require pension trustees to specify their policies in relation to environmental, social, and governance (ESG) considerations.

“Climate change is a core financial risk which trustees will need to consider when setting out their investment strategy,” David Fairs, TPR’s executive director of regulatory policy, analysis, and advice, said in a statement. “They will be obliged to show how they are taking this and other financially material considerations into account over the lifespan of investments.”

The guidance takes into consideration regulations that will begin in October 2019 and October 2020, and responds to industry requests for further guidance in certain areas. It provides updates as well as clarity for trustees, including considerations when planning investments.

While the UK’s defined contribution code sets out the standards TPR expects trustees to meet when complying with the law, the guides provide information on how they might meet those standards in practice. The guides aim to provide practical information and examples of approaches and factors to consider. TPR said the guides are “not intended to be prescriptive,” but in some cases states what it considers to be best practices.

“Consideration of ESG factors allows you to evaluate the short and long-term financial risks and opportunities of your investments by looking at the current practices of the firms in which you invest,” says the TRP in its guidance. “Environmental considerations might include carbon emissions and water management, social considerations might include employee or local community relations, and governance considerations might include board diversity and remuneration.”

The updated guidance also provides further clarity around what is meant by financial material considerations and stewardship, and provides more information about preparing an implementation statement.

UK trustees must make their investment strategy, also known as a statement of investment principles (SIP), available for free on a website beginning in October. And in October 2020, trustees must produce an implementation report that explains how they have followed and acted on the investment policies outlined in the SIP.

The SIP must include the trustees’ policies on:

  • Financially material considerations including ESG matters such as climate change
  • Stewardship of investments, such as exercising rights (including voting rights) and engaging with activities in respect to the investments
  • The extent to which members’ views, including ethical, social, and environmental views, are considered when planning investments arrangements with asset managers.

“I welcome The Pension Regulator’s updated guidance which follows the government’s game-changing regulations clarifying and strengthening pension scheme trustees’ environmental, social and governance responsibilities,” Guy Opperman, the UK’s Minister for Pensions and Financial Inclusion, said in a release.

“Pension schemes have a significant part to play in tackling the climate emergency.”

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