From 1 October 2020, trustees of both defined benefit (DB) and defined contribution (DC) schemes, with more than 100 members, will be required to include a new implementation statement relating to their scheme’s investments in their annual report and accounts (and make it publically available).
The statement needs to describe the trustees’ voting and engagement record during the scheme year. For DC schemes and DB schemes that also provide money purchase benefits (other than AVCs) (referred to below as “hybrid schemes”), the statement must also describe the extent to which the trustees have followed their scheme’s statement of investment principles (SIP) during the scheme year, including the trustees’ policies on taking account of environmental, social and governance (ESG) factors in their investment decision making, and details of any review of or changes made to the SIP during the scheme year.
The implementation statement must be made publically available on a website and, certainly for larger and more high profile schemes, it is expected that these will be scrutinised by pressure groups and the media.
What must be included in your scheme’s implementation statement?
From 1 October 2020, trustees of DB and DC schemes will be required to include an implementation statement in their annual report and accounts which covers activities during the relevant scheme year.
In relation to both DB and DC schemes, the implementation statement will be required to include:
- details of how and the extent to which, in the opinion of the trustees, the trustees have followed their policies on engagement and the exercise of voting rights during the relevant scheme year, and
- a description of the trustees’ voting behaviour (including the “most significant” votes cast by, or on behalf of, the trustees) and any use of a proxy voter during the year.
Trustees of DC and hybrid schemes are also required to include:
- details of how, and the extent to which, in the opinion of the trustees, they have followed their scheme’s statement of investment principles during the scheme year, including the trustees policies on:
- taking account of ESG factors in their investment decision making, and
- taking account of non-financial factors, such as ethical considerations and members’ views, in their investment decisions.
- a description of any review of the SIP carried out during the scheme year, including an explanation of any changes made to the SIP. If the SIP was not reviewed within the period covered by the statement, they must include the date of the last review.
When will you be required to produce your first implementation statement?
These new legal requirements come into force on 1 October 2020 and trustees are required to include their first implementation statement in their scheme’s first annual report and accounts which is produced on or after 1 October 2020. Therefore, work on the first implementation statement should already be under way where a scheme is due to publish its next annual report and accounts on, or shortly after, 1 October 2020.
Trustees of DC and hybrid schemes must publish their implementation statement online once the accounts have been signed any time on or after 1 October 2020 (but in any event no later than 1 October 2021). Trustees of DB schemes have until 1 October 2021 to publish their scheme’s implementation statement online although they can make it available sooner if they wish.
The requirement to make the implementation statement available online does not extend to the full annual report and accounts. Therefore, schemes may decide to only make the implementation statement publically available online (together with any other information contained in the annual report and accounts that needs to be made publically available) as opposed to the full annual report and accounts.
Implementation statements will need to be included in all subsequent annual reports produced on or after 1 October 2020 and made available online.
If trustees fail to comply with these new disclosure requirements they may be fined up to £5,000 (for individual trustees) and £50,000 (for corporate trustees) by the Pensions Regulator.
Fines for non-compliance are discretionary which means that we will hopefully not see a repeat of the fines issued for even relatively minor breaches of the requirements relating to the content of DC Chair’s statements, which are subject to a mandatory penalty. Having said that, we would expect the Regulator to pay close attention to the content of the new implementation statements and so care should still be taken to ensure that your scheme’s statement contains all of the required information and that you avoid including merely generic content.
Preparing your implementation statement
The PLSA has produced an excellent guide to preparing an implementation statement and we would recommend that trustees read this before they start to prepare the first statement for their scheme. The guide contains:
- a step-by-step guide to producing an implementation statement
- general principles for how to go about this
- more detailed considerations on what trustees could disclose
- specific guidance on disclosures relating to voting behaviour, and
- top tips for investment (and responsible investment) member communications.
If you need assistance preparing your scheme’s implementation statement or if you have any queries on these new requirements speak to your usual HSF adviser or contact a member of our pensions team.