Guest blog by Sasha Butterworth, Partner, and Kate Beech, Senior Associate, at BSA Associate UK law firm TLT

If you haven’t already been asked, the chances are your employees will soon start to take a heightened interest in how their pension is invested – including, for example, wanting to know whether their money avoids high-polluting industries and promotes green businesses.

As an employer, it’s important to understand how environmental, social and corporate governance (ESG) issues are affecting pensions, as well as the current nudge towards better “stewardship”, which requires trustees to take a more considered approach to how funds are being used and their alignment with ESG frameworks.

The role of stewardship

In a pensions context, “stewardship” means the responsibility schemes have to monitor, engage and intervene on matters that may affect the long-term value of their investments. The climate crisis and the UK’s legal commitment to achieving net zero by 2050 have inevitably made climate risk a figurehead issue, but stewardship encompasses a wide range of matters, with excessive executive pay another topic making the headlines.

Done correctly, better stewardship should not only improve the health of investee companies, in turn enhancing savers’ retirement outcomes, but also of the economy, people and the planet. And pension schemes, with their sizeable assets and long-term outlook, are seen as key to this progress.

Codes of conduct

Trustees have been obliged to set out their policies on stewardship since 2019; however, there’s an imminent push towards enhanced demands, and corporate sponsors will need to ensure they are prepared to engage with their schemes on these issues.

This summer, the Pensions Regulator’s (TPR’s) new “single code” is due to be published, which among other things asks trustees to follow the 2020 UK Stewardship Code “wherever possible”.

While the code is voluntary, various pension industry bodies have encouraged schemes to sign up to it or at least to follow its guidance, and TPR has urged “meaningful” engagement with it. Employers should ask their trustees how they are engaging with the issue.

Building societies should also watch out for further developments: BEIS’s recent response to a consultation on corporate governance confirms that the government aims to review the efficacy of the Stewardship Code, and whether further regulation is needed, in 2023.

Closing the gap

TPR cites research suggesting that, while nearly all defined benefit pension scheme trustees and professionals (95%) agree on the importance of ESG policies, less than half (40%) believe their scheme’s ESG policies reflect their preferred approach to sustainable investment. Savers and employers have a role to play in ensuring that schemes are accountable and encouraged to deliver better outcomes.

What do employers need to do?

As stewardship gains traction, employers should prepare to work with and support their trustees, and monitor how the trustee of any master trust they participate in is engaging on this agenda. To do this, employers should ask how their scheme is engaging with these issues and ensure there’s a clear understanding of the current legal and regulatory requirements and the direction of travel.

Employers will also want to ensure that the investment policy of the pension scheme isn’t out of step with their own ESG agenda, in order to avoid any damaging revelations. Recently, we have seen some high-profile incidents where a corporate’s ESG agenda has been misaligned with their pension scheme’s investment policies. At a time when reputation and values feel more relevant than ever, it’s important to minimise the risk of this happening.

The legal responsibility to ensure that pension scheme stewardship is meaningful rests with trustees. We are encouraging trustees to check whether their asset managers are signed up to the Stewardship Code, create and record their own stewardship expectations, engage meaningfully with managers and advisers where appropriate and document their voting wishes.

However, dialogue between employer and trustee is also vital. Employers should expect their schemes’ trustees to be asking questions of them, particularly as new climate change and stewardship requirements under TPR’s single code and the Pension Schemes Act 2021 come into force. In addition, employers should also ensure they understand the interaction of investment choices with their own scheme funding obligations.

This issue isn’t going away; we are starting to see more schemes (in the UK and worldwide) flexing their muscles in this regard. As understanding and awareness grows, it’s vital that every business knows what part it can play in bringing about meaningful change.

For more information visit: www.tlt.com/expertise/services/pensions/

The views, opinions and positions expressed within guest blogs are those of the authors and do not necessarily represent those of the BSA.