Statement of Investment Principles
Making a statement
Bo Bennett, the American entrepreneur once said, “A single question can be more influential than a thousand statements”.
While this may be generally true, trustees need to consider whether a single statement, the Statement of Investment Principles (SIP), is actually more influential than a thousand questions.
Is a SIP compulsory?
The Pensions Act 1995 s35 sets out the requirement for Trustees to prepare and maintain a SIP. For most schemes the Statement should set out the investment principles governing investment decisions.
Currently the specific requirements for the SIP are set out in The Occupational Pension Schemes (Investment) Regulations 2005; along with provisions regarding how trustees must exercise their investment powers and restrictions on the level of employer-related investments.
I referred to ‘most schemes’, as Regulation 6 of the Investment Regulations1 actually dis-applies this requirement for a scheme which has fewer than 100 members; or a scheme, which is established by or under an enactment and is guaranteed by a public authority.
The Law Commission in its report on the Fiduciary Duties of Investment Intermediaries, (published 1 July 2014) recommended that the Government review this exemption; however, the Government has decided that it will remain.
What should the SIP contain?
Under Regulation 22, the SIP must be in writing and must cover at least the following matters:
(a) the trustees' policy for securing compliance with the requirements of section 36 of the Pensions Act 1995 on choosing investments;
(b) the trustees’ policies in relation to -
(i) the kinds of investments to be held;
(ii) the balance between different kinds of investments;
(iii) risks, including the ways in which risks are to be measured and managed;
(iv) the expected return on investments;
(v) the realisation of investments, and
(vi) the extent (if at all) to which social, environmental or ethical considerations are taken into account in the selection, retention and realisation of investments, and
(c) the trustees’ policy (if any) in relation to the exercise of the rights (including voting rights) attaching to the scheme’s investments.
Additional useful information to include
The Law Commission report makes recommendations which would effectively extend some of the existing requirements. While not currently an obligation, trustees could consider including the following when drafting their SIP:
- Environmental, social and governance (ESG) factors - the requirement to set out the trustees’ policy about the extent to which ESG factors are taken into account, so that it accurately reflects the distinction financial and non-financial factors.
Financial factors are relevant to trustees’ primary investment duty of balancing returns against risks, at the time of the investment decisions.
A non-financial factor is one motivated by other concerns, such as disapproval of certain industries. In general, non-financial factors may be taken into account if two tests are met:
i) trustees should have good reason to think that scheme members would share the concern; and
ii) the decision should not involve a risk of significant financial detriment to the fund.
- Stewardship - While the Investment Regulations require comment regarding the exercise of voting rights; the Law Commission recommended that it would be helpful if there was a broader requirement that the SIP contain a statement of trustees’ policy (if any) on stewardship.
For example, trustees should disclose if they intend to engage with companies or exercise voting rights, either directly or through their investment managers, and how this will be achieved.
The Government in its Progress Report on the implementation of the Kay Review on 27 October 2014 broadly accepted these recommendations and promised to consult at the earliest opportunity on changes to the Investment Regulations.
In addition to these points it can be useful and cost effective for the SIP to include comment upon the following:
- Delegation of powers regarding investment decisions e.g. to a number of trustees or a specific investment sub-committee
- The position regarding employer-related investments
- Following section 36 advice, time-limited standing instructions for subsequent investments into existing funds (e.g. for additional cashflow) and instructions regarding disinvestments.
Who should trustees engage?
In drafting or revising a SIP, the trustees must obtain and consider written advice. However there is no requirement for this to come from a qualified or FCA Approved Person, it can come from an adviser who is ‘a person who is reasonably believed by the trustees to be qualified by his ability in and practical experience of financial matters and to have the appropriate knowledge and experience of the management of the investments of such schemes’.
The trustees must also consult the employer regarding the strategy detailed within the SIP. The trustees do not have to agree with the employer or carry out their wishes, but must carefully consider their views.
The SIP should be reviewed and updated as appropriate at least once every three years. In addition it must be revised without delay after each significant change in policy; again consulting with the employer when making any changes.
An obligation not an option
Unless the small scheme exclusion applies, the requirement for a SIP cannot be ignored. Indeed, trustees who wilfully choose a route of non-compliance could face prohibition – preventing a person from being a trustee of a scheme - or even civil penalties.
Even if it takes a thousand questions, the Statement of Principle is an essential and highly influential document for any trustee.
1 S6, The Occupational Pension Schemes (Investment) Regulations 2005 2 S2, The Occupational Pension Schemes (Investment) Regulations 2005