Implementation statement rules could be reviewed in bid to push stewardship up trustee agenda

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The Department for Work and Pensions plans to zero in on stewardship and voting policies as it looks to eradicate box-ticking, and is considering a review of the implementation statement, a senior policy manager has said. 
Pension scheme trustees have focused much of their governance time on new requirements to report on their approach to environmental, social and governance issues in their statement of investment principles, and on their implementation statements in the wake of this. More recently, particular focus has been on climate change, as the Pension Schemes Act requires them to align with the Taskforce on Climate-related Financial Disclosures. 

DWP sharpens focus on stewardship policies 

While some schemes acknowledge that ESG policies often ultimately require schemes to become more active owners of securities and develop a voting policy, many have put this on the ‘too difficult’ pile, citing the fact that they invest in pooled funds where the manager does not respond to one client, or in an index, where divestment is not a real threat for investee firms. 
But the DWP, after campaigning by the Association of Member Nominated Trustees, has put a stake in the ground with the creation of a new taskforce to review the UK’s shareholder voting system, and it appears there is appetite to require a more active approach from schemes that goes beyond the current requirements.
“One thing we’ll be interested in, in trying to encourage schemes of all sizes to move beyond, is the, ‘We delegate it all to our asset manager’ kind of statements in relation to voting and engagement,” said senior policy manager at the DWP, David Farrar. 
He said that he has seen “real traction now on the investment strategy side of things”, with barely a week going by in which a scheme is not announcing a new climate tilt to its default fund or a net zero target but added: “It still feels like there’s probably progress to be made on the stewardship and voting side. That’s certainly an area that we’ll be wanting to look at.” 
The implementation statement, in which schemes need to report their stewardship and voting, “still feels like a work in progress”, he added and admitted that regulations had led to some confusion about its scope, with the Pensions and Lifetime Savings Association stepping in with a guide for schemes. 
He also said there was also a lack of differentiation in the implementation statement, unlike the TCFD regulations where a phased approach is being taken. “It felt as if the implementation statement has been a bit more the boring, box-ticking compliance exercise at the smaller end of the market where capability is lower," Farrar noted.  
“That's something we'll really be thinking about over the coming months as we think about whether any kind of review of the implementation statement is necessary and if so, what form that takes,” he added. 

Who should cast the vote? 

A growing number of schemes are not just looking for alignment of managers’ voting behaviour with the trustees’ views but are giving scheme members a direct say over the issues being voted on.
Farrar said that the DWP is “tracking this with interest” and wants to talk further to stakeholders about it. 
Highlighting that member views can be taken into account based on the Law Commission’s 2014 report, he said it “could be a good shortcut” but warned that “if you do it, you have to mean it”, as members could become actively disengaged if managers do not end up giving their views due weight. 
Andrew Warwick-Thompson, a professional trustee at Capital Cranfield who chairs the Scottish Widows Master Trust and sits on the Cushon Master Trust board, said it is important for trustees to know what the members are thinking but cautioned that trustees need to be careful about the legal constraints. A default fund needs to reflect the best approach “on average”, he argued, as it should be suitable for everybody in the scheme, with other approaches confined to the self-select range. 
However, he also revealed he expects the Cushon Master Trust “will have a facility that will allow [members] to express views in relation to shares or funds” which will be directly passed on to the managers, and that “Scottish Widows will roll out something very similar”.  
“It's their money, so they ought to have some sort of say,” he added, saying that giving members a vote helps to engage them. 
Shareholder voting and climate friendly investments are “an opportunity to talk to members” and explain that they have agency, agreed Gerald Wellesley, a client director at Punter Southall Governance Services who acts as trustee of the Fidelity Master Trust, Scottish Widows Master Trust and the National Pension Trust. He believes members can become engaged if they are told that investing a certain sum sustainably has an equivalent effect on the climate as taking several cars off the road, for example. 
The implementation statement, while often seen as just another thing on trustees’ ‘to do’ list, is “a great opportunity” to show members what the scheme is doing and how, said Caroline Escott, a trustee director at the Standard Life Master Trust. However, “getting the member to understand what responsible investment is, is a journey” she said. 

Caroline Escott
Gerald Wellesley
David Farrar

How is your scheme approaching stewardship?