Regulator considers ESG compliance check, fewer chair’s statement fines and clarity on diversity

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The Pensions Regulator is “likely” to start a regulatory initiative on compliance with new environmental, social and governance investment requirements. It has also given insight into responses to its trusteeship consultation and revealed TPR will talk to government about DC chair’s statements so it only has to issue fines where there are material breaches. 
While the single governance code, the DB funding code and new powers are the headline topics in pensions regulation next year, David Fairs, TPR executive director for regulatory policy, analysis and advice, gave some clues about other areas that could see initiatives and tweaks in the near future at the Pensions and Lifetime Savings Association’s annual Trustee Conference last Thursday. 

'We will check that people are compliant’ with ESG rules 

Compliance with new rules for schemes on declaring their ESG policies is something that has no date yet but is likely to happen, he said: “It’s likely that we’ll start a regulatory initative on [ESG]. I can’t quite say when, but we will check that people are compliant with those requirements,” revealed Fairs. 
Since October this year, DB and DC schemes have had to update their statement of investment principles to include information on their approach to ESG and non-financial factors. From October 2020, they will have to give even more information, showing what their arrangements with asset managers are when it comes to ESG and how they incentivise them in terms of stewardship. DB schemes will also need to make their SIP public, and from October 2021, larger DB schemes will have to publish an implementation statement. 
Fairs said the regulator will ensure schemes under one-to-one supervision will comply “well in advance of deadline”. But in addition, TPR could write to around 1,000 schemes; depending on the percentage who are fully compliant, the initiative will end there or continue, he explained.  
“Where we write out to 1,000 people and [only] 30% respond that they’ve done what they were supposed to, we’ll keep going until people get the message that we do want you to comply in this area,” he said. 
He compared this to TPR’s recent initiative on record-keeping, when the regulator had contacted 1,200 schemes to check that data reviews were being carried out. Having received their responses, it told 400 trustee boards to urgently review their data given they had not done so in three years. Fairs described the approach as “proportionate”, as schemes were not fined straight away but given a time period to comply. 

‘More clarity’ on how to appoint trustees 

While the regulator can issue fines for non-compliance in this area, this will be unlikely when it comes to diversity, another of its key topics next year. However, Fairs indicated that TPR might give practical advice on how to go about appointing trustees to boards. 
“It is something I think we will provide more clarity around,” said Fairs. “We are trying to get a more diverse trustee group.” 
He admitted some schemes have challenges with the number of trustees coming forward, “but there are ways, we have had input from different schemes on how they deal with diversity, how they get people interested”. This could involve ‘selling’ being a trustee as a role where individuals develop transferable skills.  
Fairs said he is passionate about diversity, adding that while some voices within the industry are arguing for ‘cognitive’ over other forms of diversity, “we have a public equality duty”, implying that this does mean trustee boards need to become more diversity in terms of gender, ethnicity, class etc. 

Record number of responses to trusteeship consultation 

The regulator will likely respond to its ‘Future of trusteeship and governance’ consultation in February, unless government business pushes this back. A record number of responses has been received, Fairs noted, many from sole trustees seeking to convince TPR of the benefits of their form of trusteeship.  
When it comes to sole trustees, the regulator is not just concerned about sole traders, but also about sole corporate trustees, noted Fairs. Looking at valuations, he said he sometimes wondered whether negotiations had been as robust as they could have been, and TPR has also come across investment strategies that were not appropriate.  
Having the entire trustee appointed by the employer also leaves it at risk of being manipulated, with one sole trustee provider having been replaced by a "more amenable" one just a few months into their appointment, he recalled. 
"There are instances of good governance," said Fairs, but believes that governance within sole trusteeship was partly driven by the fact the regulator has been talking about the need for it: "The more we have talked about it, the more governance in those firms seems to have stepped up."
While the industry had similar concerns, there is however “little hard evidence” to show that sole trusteeship is detrimental, and so the regulator might seek more information in this area, Fairs noted. 
Responses were split on whether a professional trustee should sit on every board, with professional trustees strongly in favour and others more sceptical. While most said that there are not enough professionals to put this proposal into practice, the regulator is keen to reduce the number of schemes to solve the problem from the other side. 
Fairs said there was general support for having a minimum qualification for trustees, with some concern about the burden for small and charity schemes. 

Many responses also highlighted the need for employers to give trustees sufficient time off to fulfill their duties, even though this was not part of the consultation. 

Chair’s statement fines perceived as unfair 

Aside from its trusteeship consultation, TPR has also had much feedback on DC chair’s statements, where mandatory fines have meant that even minor omissions result in a fine. 
The regulator itself does not seem overjoyed with how legislation was written. Fairs said: “Legislation forced us to fine people even for quite technical breaches. That’s a challenge because it doesn’t seem fair… [but] the legislation doesn’t give us any choice.” 
It is an area that “we’ll talk to elected government about to make sure we only fine [schemes] for material breaches”. 

Do you agree with TPR’s approach to ESG compliance, governance and chair’s statements?