26: Time for schemes to prepare and publish implementation statements
From 1 October 2020 trustees of defined benefit (DB) and defined contribution (DC) schemes will be required to include a new implementation statement concerning scheme investments in their annual report and accounts and to make it publicly available on a website.
The new requirements form part of an increasing focus on transparency, public accountability and good governance in pension schemes that are seen as to key to improving member outcomes.
Who does it apply to?
The requirements apply in full to DC schemes and DB schemes that also provide money purchase benefits, excluding AVCs (hybrid schemes). Less extensive requirements apply to DB-only schemes. The requirements do not apply to schemes with fewer than 100 members.
What does it involve?
For both DB and DC schemes, the statement must include:
- details of how and the extent to which, in the opinion of the trustees, the trustees have followed their statement of investment (SIP) policies on voting and engagement during the 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.
DC and hybrid schemes must also include:
- details of how, and the extent to which, in the opinion of the trustees, the trustees have followed the SIP during the year, including taking into account environmental, social and governance (ESG) factors and non-financial factors (such as ethical considerations and members’ views), in their investment decisions; and
- a description and explanation of any changes made to the SIP during the scheme year.
If an occupational pension scheme has both DB and DC benefits, the more extensive DC requirements apply to the whole scheme, even if they are run as if they are separate schemes (eg with segregated sections). In that case, schemes must report on the implementation of their DB investment policies as well as their DC policies.
When does the SIP Implementation Statement need to be published?
Implementation statements need to be included in year-end accounts from 1 October 2020.
DC and hybrid schemes must publish their implementation statement online once the accounts have been signed and no later than 1 October 2021.
DB schemes have until 1 October 2021 to publish their scheme’s implementation statement online (although they can make it available sooner once they have signed the relevant accounts).
Penalties for non-compliance
If trustees do not comply with the implementation statement requirements the Pensions Regulator may issue a fine of up to £5,000 (for individual trustees) and £50,000 (for corporate trustees).
The discretionary nature of the fines may reduce the risk of fines for technical breaches but the likelihood of Pension Regulator scrutiny (given its engagement with DC Chair statements) means the statements should not be treated as a tick box exercise.
Advice for trustees
As ESG concerns, particularly climate change, gain increasing attention, and with governance documents becoming more public, both DB and DC schemes may find themselves under greater scrutiny from the public, policymakers and scheme members. The Pensions and Lifetime Saving Association has produced this helpful guide to preparing an implementation statement.
The growing governance and financial burden on affected schemes, especially DC schemes may give trustees and sponsoring employers pause to consider their pension provision and in particular legacy DC schemes and sections of schemes where the costs may have limited benefit for the current workforce.
Our experienced pensions law team has the expertise to advise on compliance with the implementation statement and other matters related to DC governance, scheme closure and consolidation.