The starting point is pension schemes' core legal duties in relation to governance and investment (including consideration of their proper purposes and scheme members' best interests). In recent years there has been extensive legal debate, following a Law Commission report, about how these duties apply in the ESG and responsible investment context: for example, see our article in Trust Law International.
The interface with sponsoring employers is essential here because the obligations will broaden and deepen in the near-term and, in defined benefit schemes, may interact with sponsors' scheme funding obligations.
The core duties are now also supplemented by an increasing amount of specific law and regulation. As a result, many pension schemes are now legally required to disclose (and therefore to develop) investment policies covering asset manager arrangements, climate change, other financially material considerations and the extent to which non-financial matters such as member views are taken into account in the investment strategy.
In respect of governance, the Pension Schemes Act 2021 will require many schemes to develop effective governance systems in relation to climate change risks, and to make mandatory disclosures aligned with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). Under current proposals, this will apply initially to schemes with assets with assets in excess of £1billion (and to authorised master trusts and collective defined contribution schemes), with a further review expected in 2024 to consider whether the regime should be extended to smaller schemes. As well as statutory guidance, there is also non-statutory guidance developed by the Pensions Climate Risk Industry Group about how pension funds can align themselves with TCFD recommendations. Travers Smith presented a client roundtable on the original DWP proposals and contributed a response to its 2020 consultation. We have also produced a Bitesize Guide explaining the key aspects of the requirements.
Alongside this, regulators are increasingly focussed upon pension scheme governance and board diversity (see, by way of example, this consultation response from the Pensions Regulator, and our PLSA article). The Pensions Regulator has now published a new code of practice on own-risk assessments and effective scheme governance.
The Association of Pension Lawyers (the APL) has issued a paper seeking to clarify when trustees of occupational pension schemes can take into account non-financial factors when investing. The paper was launched following a September 2020 webinar co-presented by Travers Smith, the slides from which are available in the link to the paper (the webinar slides also provide some notes on the limitations of the recent Supreme Court case of R (on the application of Palestine Solidarity Campaign Ltd and another) v Secretary of State for Communities and Local Government).
Travers Smith co-authored the Impact Investing Institute's October 2020 paper Impact investing by pension funds: Fiduciary duty – the legal context. This paper examines the compatibility of impact investing and the fiduciary duties of pension scheme trustees when trustees are making investment decisions.
This article published in the International Comparative Legal Guides, written by Travers Smith Partners Jonathan Gilmour and Andy Lewis, discusses the ways in which ESG is emerging in pensions law and specific considerations in this respect for pension scheme sponsors and managers.
More recently, Jonathan Gilmour and Andy Lewis, contributed a new chapter, in the International Comparative Legal Guide on Environmental, Social & Governance Law 2022. The new chapter outlines the key aspects of ESG law for occupational pension schemes and argue that ESG should be approached as a governance matter as well as an investment matter.