In this interview with Lexis PSL, Anna Copestake explains to Giverny Tattersfield that while members have no direct say in where their pension fund in an occupational pension scheme is invested, there are options for seeking further information and making their opinions heard.

Are members entitled to know where their scheme invests pension funds?

There is no general legal duty on employers to provide information about the investments of a trust-based occupational pension scheme to their employees. In practice, however, employers may decide to direct employees to the trustees if they have any questions. This is because the scheme’s investment power sits with the trustees.

In fact, the trustees are not even required to get the employer’s consent (according to section 34(5) of the Pensions Act 1995) regarding where the scheme invests pension funds. Nevertheless, the employer must be consulted about the scheme’s statement of investment principles (SIP) (see regulation 2 of Occupational Pension Schemes (Investment) Regulations 2005, SI 2005/3378). The employer, therefore, still plays an important part.

Members of the pension scheme can also request a copy of the SIP from the trustees. This should summarise the scheme’s investment strategy and the extent to which social, environmental or ethical considerations have been taken into account, which can be of interest to members. The scheme’s annual report should also contain an investment report containing this information (Sch 3, Pt 5, paras 27-30, The Occupational and Personal Pension Schemes (Disclosure of Information) Regulations SI 2013/2734). This information, however, is likely to be high level. It will usually outline the investment strategy, the name of the fund(s) (white-labelled‚Äîeg giving generic descriptions to funds‚Äîor not), the broad asset allocation (namely, the split of equities, bonds or cash) and the trustees’ approach to environmental, social and governance (ESG) or ethical considerations.

Although intended to meet the trustees’ obligations under disclosure legislation, the SIP and annual report may not provide the detail the member is seeking. For example, these documents are unlikely to name the underlying companies in which asset managers have invested. This level of granularity tends not to be included in member literature. In fact, ‘white-labelling’ of a fund can be advantageous to trustees in defined contribution (DC) pension funds by reducing the likelihood that member consent would be needed for future changes to fund composition. Indeed, as DC members choose their options, they are often more engaged than members in defined benefit (DB) funds. But it is worth remembering that even the trustees (and the employer) may not know precisely which companies are being invested in (eg, where they use pooled investment vehicles).

A possible exception to this might be a DC ‘ethical’ self-select fund. In this type of fund the investment strategy is intended to align with a particular moral or ethical viewpoint. If members wish to invest because of that viewpoint, they can ‘self-select’ (ie choose) to invest all or part of their savings in that fund. The literature describing that fund may naturally provide more detail about the underlying investments in order to help the member understand the investment strategy.

In many cases, whether trustees (or employers) decide to share information about the underlying investments will largely depend on member appetite, the information available, and the circumstances of the request.

If there is an objection, moral or otherwise, how can members challenge the scheme’s investment plans? Is a challenge likely to be successful?

Member questions about scheme investments are increasingly focussed on ESG or ethical considerations, such as those raised by Dr Bronwyn King this year. She discovered that her pension scheme was investing in cigarette companies—the very same cigarette companies that were giving her patients cancer.
The primary role of the trustees is to act in the financial interests of members, as in the oft-quoted case of Cowan v Scargill [1985] Ch 270, [1984] 2 All ER 750, which concerned the investment of assets of the Mineworkers’ Pension Scheme. The judge in this case held that the starting point of the trustees’ investment duty is to exercise their powers in the best interests of the beneficiaries and, where the purposes of the trust is to provide financial benefits, the best interests of beneficiaries are normally their best financial interests.

It is worth noting that, although trustees do not need to treat members equally, they must act impartially. So an individual’s views would not be sufficient to cause a change in strategy. In the same way, employers are unlikely to try and drive a change in strategy to accommodate the views of a small number. However, challenges may still bring about change. A challenge may, for example, trigger a more general review of the scheme’s investment approach, particularly regarding ESG and ethical considerations.

In 2014 the Law Commission reported on the ‘Fiduciary Duties of Investment Intermediaries’. The Commission said that:

• the primary aim of an investment strategy is to secure the best realistic return over the long term
• trustees may take into account any factor relevant to the long-term performance of an investment, including risks to a company’s long-term sustainability, often referred to as ‘ESG factors’, and
• trustees should take into account financially material risks. It is a matter of trustee discretion, having taken proper advice, to determine what these risks are. Again, they may include ESG factors Member challenges may therefore indirectly result in the trustees adopting a policy on the use of ESG factors or updating any existing policy. It would be harder for member challenges to cause trustees to make ethically-driven investments, such as those motivated by non-financial concerns (for example, a moral objection to certain industries). However, the Law Commission said that trustees may take these factors into account when investing scheme assets provided they ask themselves whether they have good reason to think the scheme members share their concern and whether the investment decision risks significant financial detriment (unless the fund is a DC self- select fund).

If a member wants more control over where his or her pension funds are invested then it is possible to transfer funds to another arrangement (subject to the requirements of Part 4ZA of the Pension Schemes Act 1993 and the scheme rules). Financial advice may be advisable when deciding if this is an appropriate step to take, however. Independent financial advice would be required in the case of a transfer of DB benefits valued in excess of £30,000 to a DC arrangement (section 48 of the Pension Schemes Act 2015). This is a requirement that was introduced in 2015 to try and protect members from unwise DB to DC transfers.

Are there any circumstances under which the trustees may have to shift investment practices? Has this happened previously?
It is advisable for trustees to keep the investment strategy under review to ensure that it remains appropriate. However, there are things that may trigger a review of investment strategy. Although triggers are often specific to the profile and circumstances of the individual scheme, they may include changes to employer covenant, scheme funding, benefit design (including closure to accrual), membership profile (eg closure to new entrants or following a bulk transfer in), investment performance, or a decision to review the scheme’s approach to ESG consideration. A pension scheme is, after all, a long-term savings vehicle so trustees (and employers) will want to ensure that it is equipped to deliver the promised benefits.

Are there any other interesting trends in this area?
We only have to look at the impact of climate change on corporate sustainability to see the day-to-day impact of ESG considerations on investment returns. It is now possible for affected businesses to see an increase in costs due to compliance with reduced carbon emission targets and/or devaluation in fossil fuel reserves, for example. In a similar way, an increase in member engagement with the pension scheme may be able to push the issue up corporate and trustee agendas. Particularly in DC schemes where members are able to make individual investment choices and, as a result, are encouraged to engage with their pension savings by trustees.

The Pension Regulator’s new DC code and guidance refers to the Law Commission’s report and expects trustees to think about the long term when setting an investment strategy. In addition, and subject to the impact of Brexit, if the UK adopts the new Directive on occupational pension funds (IORP II) in full, there may be additional requirements to include ESG considerations in scheme literature and risks assessments. So the spotlight on where and how pension funds are invested may be focussed here for the foreseeable future.

Download a printable version of this interview here.