6 April 2020
Pension schemes are lagging behind the curve when it comes to taking into account member views on how they want their savings invested, according to LCP.
New rules come into force today requiring contract-based pension schemes to report their policy around member views, including how schemes take account of members’ ethical concerns regarding environmental, social and governance (ESG) issues when making investment decisions.
The new rules from the FCA set out new duties for the Independent Governance Committees (IGCs) and Governance Advisory Arrangements (GAAs) that oversee such schemes. They must consider and annually report on their scheme’s policies around ESG issues, member concerns and stewardship. Similar rules came into force for trust-based pension schemes on 1 October 2019.
Pension schemes are allowed to take account of member views if this is justified on financial grounds, or if it is a shared viewpoint and taking it into account does not risk significant financial detriment. The challenges of identifying what member views are and evidencing that members share the same view, are some of the reasons why few schemes currently seek member views when making their investment decisions.
With policymakers and civil society organisations showing increasing interest in member views, pressure is only set to increase on schemes to listen to member views. A new guide from LCP highlights that discussing ESG and ethical issues with members may be a good route to increasing their engagement on the whole topic of pensions.
Claire Jones, Head of Responsible Investment at LCP, commented: “There is an increasing body of survey evidence that pension savers want their money invested responsibly. While there are barriers to taking account of member views, listening to members will be following the direction of travel of policymakers and regulators and is also a good tool to promote member engagement, explaining how their pension is invested and how this relates to things they care about.
“Reviewing existing evidence of member views, for example from published surveys of the general public and the scheme’s correspondence with members, and finding out what options your scheme has for investing in ESG or ethical funds are good first steps. Look for ways to include ESG topics in member communications and consider opening a dialogue with members in this area. Schemes do need to tread carefully though – for good reasons, many schemes invest in companies that members could consider ethically dubious, so they need to be ready to explain why they do this.
“There is a tension here between listening to what pension savers want, which may include avoiding certain investments on ethical grounds, and acting in their best financial interests. Greater clarity is needed from policymakers and regulators around how to address this tension.”
You can download Member views: implications for your investment strategy HERE