The FCA made the following statement in its 2018 business plan. published this week
We are currently undertaking wider policy work on Independent Governance Committees (IGCs) for workplace pension schemes to look at the possibility of extending their remit. This wider work includes possible changes to the rules for IGCs to improve governance and value for money for consumers, following recommendations on social investing from the Law Commission. FCA 2018 business plan.
This is what the Law Commission said
The assets in DC schemes are expected to increase sixfold by 2030 to £1.68 trillion, a sum equivalent to 15% of the current net wealth of the UK. These changes raise questions about how the new pension assets are to be invested and, in particular, whether at least a proportion could be invested for the wider social good or “social impact”.
and this is what they see stopping social impact investment
The barriers to social investment by pension funds that we identified were, in most cases, structural and behavioural rather than legal or regulatory.
Ian Pittaway, IGC chair at Aegon expands to Professional Pensions on the barriers for IGCs, explaining that unlike trustees, they don’t have the right to hire and fire
“We’re more reviewers and influencers and persuaders; were not actually decision-makers,” he said. “This wouldn’t be a big bang solution, it would be every year, we would question – interrogate – the provider about what their social impact policies were and there would be a dialogue about that and we’d seek to influence it.” Professional Pensions
Ian is right, but that shouldn’t stop IGCs influencing the behaviours of their providers to ensure that they enforce good practice when it comes to the environment, social purpose and governance. In practice, few trustees have the capacity to directly influence on ESG, they leave it to asset managers who may themselves outsource voting to organisations like PIRC and Manifest. The cry that “it ain’t our job guv” is weak if everybody says it at the same time; better that the cry was “it’s all of our job”.
In the first round of IGC Chair statements, only Aviva mentioned ESG, by last year, Aviva had been joined by L&G, this year, almost every IGC statement has a statement on ESG(bizarrely, one of the few exceptions was Aegon’s). The quality of these ESG statements varies from an informed critique, to what appears to be little more than a “cut and paste” from the provider’s promotional material.
Clearly this is a start, but clearly the FCA wants more. Since the vast majority of workplace saving is invested through defaults, IGC’s should be asking what aspects of the default are being managed on ESG grounds; the FCA may not be satisfied that the provider offers an ESG fund. This may be regarded as tokenism. One occupational scheme operates an ESG tilted fund as its default. This is the HSBC staff scheme which uses the LGIM Future World fund as its defaults. Some employers, such as the RSPB, have also adopted Future World as the default for their contract based scheme.
Legal and General are reported to be building an ESG tilted version of their multi-asset fund, meaning that employers not wishing to adopt a pure equity approach, can also benefit from the value of ESG.
In time, we may expect to see ESG as integral to the construction of DC funds as seat belts are to cars, vans and lorries. The Law Commission may want that time to be sooner than many IGCs are planning for. This is its recommendation
For contract-based pensions, the Financial Conduct Authority should require schemes’ Independent Governance Committees to report on a firm’s policies in relation to:
- evaluating the long-term risks of an investment, including relating to corporate governance or environmental or social impact;
- considering members’ ethical and other concerns; and
- We also recommend that the Financial Conduct Authority should issue guidance for contract-based pension providers on financial and non-financial factors, to follow the guidance for trust-based schemes given by The Pensions Regulator.
We suggest ‘options for reform’ in the following three areas:
investment in social enterprises (such as charities and community interest companies);
investment in property and infrastructure; and
encouraging savers to engage more actively with their pensions.