The UK's Pension Regulator's new code of practice for occupational trust-based defined-contribution (DC) pension schemes and the publication of six ‘how to’ guides to give comprehensive guidance to trustees has been warmly welcomed by a number of responsible investment groups.

The UK Sustainable Investment and Finance Association (UKSIF) said that the investment governance guide is clear that the schemes’ investment governance arrangements need to be consistent with its legal powers and responsibilities as outlined by the Law Commission’s 2014 report into fiduciary duties. This, UKSIF added, represented a huge boost for responsible investment in the UK and was the  first time the Law Commission’s review had been reflected in regulation or legislation since it was published in 2014. The Law Commission’s clarifications on fiduciary duty had stated that trustees should take into account ESG risks where they are financially material. However, the government decided last November not to accept the Commission's recommendations to amend the pensions regulations with the aim of providing greater clarity for trustees when considering environmental, social and governance (ESG) issues arguing there was not a sufficient consensus about how to proceed with the new regulations.

Simon Howard, Chief Executive of UKSIF, said, “We welcome The Pensions Regulator’s new code of practice for defined-contribution schemes and specifically the publication of accompanying ‘how to’ guides. The guide on investment governance is particularly welcome and we were pleased to see our opinions have clearly been taken on board by the regulator and at times directly reflected in the wording of the guidance. This is great news for trustees of DC schemes who have for the first time since the Law Commision’s work in 2014 had their responsibilities clarified by the regulator. As ever, more can be done, and we look forward to working with The Pensions Regulator to ensure trustees of defined benefit schemes also receive the same clarification.”

ShareAction, which campaigns for responsible investment and greater engagement with pension scheme members, also welcomed the strengthened guidance for pension fund trustees on the consideration of ESG factors and the inclusion of a statement in the code that the regulator expects pension trustees to take account of risks affecting the long-term financial sustainability of investments when setting investment strategies. It also noted that the investment governance guide pays particular attention to how trustees may take into account financial and non-financial ESG factors as well as providing detailed explanations of how trustees should consider long-term sustainability.

Rachel Haworth, Policy Officer at ShareAction, said, “The Pensions Regulator’s decision to include this guidance for trustees is extremely encouraging. The guidance for pension trustees is clear: they have a mandate to consider all risks that could affect the financial performance of their funds, and this includes ESG risks.”

ShareAction said that misconceptions about trustees’ legal duties to their beneficiaries remain widespread in the industry and many schemes were failing to take material ESG issues, like climate risk, into account. The communicating and reporting guide also provides detailed guidance on ways in which trustees can engage with pension scheme members and assess their views, following its recommendations, ShareAction said.

Jonathan Hoare, Director of Policy & Investor Networks at ShareAction, said, “We’re proud to have played an important role in helping shape the new guidance.  We are also delighted that it covers member engagement. Whilst some UK schemes already do a terrific job of listening to their members, they are few and far between. A truly responsible investment system looks after savers' best interests both by considering the full range of risks that can affect their savings and by listening to people’s views. The new code is a crucial step towards the kind of system we want to see.”