What’s the context?

Voting and engagement are key tools for pension schemes to influence company behaviour and protect long-term value. Trustees should ensure clear policies guide how votes are cast and how managers engage with companies, with transparent reporting on outcomes to demonstrate accountability.

“Voting activity should not be considered in isolation from what should be an investor’s ongoing dialogue with companies and its broader stewardship strategy.”
– Pensions UK

What are my compliance obligations?

From 1 October 2020 requirements under the Occupational and Personal Pension Schemes (Disclosure of Information) Regulations 2013 (the Disclosure Regulations) required trustees of schemes in scope to produce an annual implementation statement (IS) setting out how they have acted on policies in their statement of investment principles (SIP) in the previous year.

Further guidance published by the Department for Work & Pensions (DWP) in June 2022 (the DWP SIP & IS guidance).

The guidance contains both statutory and non-statutory guidance. Trustees are not obliged to take into account the non-statutory part. It is intended to encourage good practice. As well as SIPs, the guidance concerns implementation statements that trustees are required to prepare in respect of any scheme year ending on or after October 2022. Early preparation of implementation statements is key. Trustees on the front foot for these statements will be best placed to compile annual reports.

Most significant votes

Trustees must describe in their implementation statement the voting behaviour by, or on behalf of, the trustees during the year. Trustees should include relevant statistics to help describe voting behaviours – ideally broken down into types of issue, including ESG.

In addition, the DWP SIP & IS guidance contains substantial details on most significant votes, noting that what constitutes a most significant vote will vary from scheme to scheme, in the same way that stewardship priorities will differ.

The guidance states that it is likely and desirable that most significant votes are aligned with a scheme’s stewardship priorities or themes, stressing that a thematic approach towards most significant votes allows trustees to consider the links between a scheme’s stewardship priorities and voting behaviour.

It provides a list of suggested information that trustees should include in respect of most significant votes in the implementation statement, including which stewardship priority the vote was linked to, as well as why the trustees consider the vote to be most significant.

Expression of wish

As part of the global response to climate change and other sustainability issues, trustees are being increasingly required and encouraged to improve their stewardship activities, and this is certainly an area to watch. Reports in recent years by both the Taskforce on Pension Scheme Voting Implementation and the Investment Association have focused on giving pension savers a voice and embedding the relationship between investment managers and pension schemes.

The DWP SIP and IS guidance supports the idea of trustees providing their managers with a trustee “expression of wish” over voting policies. This was originally a recommendation of the Taskforce on Pension Scheme Voting Implementation (September 2021).

It is clear in the DWP SIP and IS guidance that the Government considers the Pensions Regulator (TPR) as the prime audience of the SIP and implementation statement, as opposed to the scheme membership itself. Nevertheless, trustees are encouraged to write both documents in plain English, allowing a reasonably engaged and informed member to interpret and understand the disclosures. Trustees are also encouraged to consider producing member-facing summary versions.

The DWP SIP & IS guidance also cross-refers to the UK Stewardship Code and indicates areas of potential alignment between the implementation statement requirements and the UK Stewardship Code principles. It explains that trustees can use the information in their Stewardship Code reports in their implementation statements provided that information meets the legal requirements.

What’s coming down the track?

This is not an area for complacency. On 30 July 2024, TPR published its findings from a review of trustees’ compliance with ESG duties, including climate reporting obligations, SIPs and implementation statements. While the review found that most trustees meet their ESG duties, TPR’s comment when the review was published said that “many achieve only minimum compliance”, for example failing to “demonstrate ownership” of ESG policies and key activities.

TPR suggests that trustees should consider:

  • whether consolidating their scheme could benefit members, where trustees believe they lack the expertise or scheme governance scale to manage financially material ESG risks effectively, and
  • being early voluntary adopters of other ESG related reporting such as nature, biodiversity and social factors, as ESG disclosure reporting requirements “are likely to continue to expand”.

TPR would also like to see “more evidence of trustee oversight” in relation to delegations to investment managers.

For details on how stewardship fits within TPR’s governance expectations, see The General Code