What goes into your pension scheme’s implementation statement?

Topic:

Hot topic

Date published:

Thursday, 8 October 2020

Author:

Kevin Clark

I’ve done it! I’ve signed off my first implementation statement – and what an experience that was too.

Trying to figure out what does (and doesn’t) need to go into your pension scheme’s implementation statement and when you need to publish it by can seem quite complicated. It is an interesting process though, and really does encourage pension trustees to consider how their statement of investment principles (SIP) is being implemented. That’s fortunate, given it was one of the main reasons for the introduction of implementation statements.

Getting it right

The Pension and Lifetime Savings Association (PLSA) has issued some helpful implementation statement guidance and templates for pension trustees. I thought LCP’s Laura Myers summarised things nicely during a recent Thames Valley PLSA meeting when she highlighted the main questions pension trustees need to ask themselves and the key areas you need to cover:

The key thing is to keep asking yourself, “What does our SIP say?” then “What have we done?”

What we did

This particular pension scheme has AON as fiduciary manager for the defined benefit (DB) section and Legal & General (LGIM) for the defined contribution (DC) section. In preparing our implementation statement, the pension trustees had high level training and updates on responsible investment ratings and engagement carried out within the underlying investment funds. As part of this process, the trustees formalised their affirmation of the importance of managers appropriately considering environmental, social and governance (ESG) factors. We analysed engagement, activity and implementation.

For DB section engagement, AON provided a stewardship report covering research from 22 deep dive meetings with equity and fixed interest managers to discover the degree of ESG integration.

Equity managers’ activities were rated on:

• mixed levels of understanding
• Task Force on Climate-related Financial Disclosures (TCFD) reporting frameworks
• the lack of implemented changes to investments to achieve a 2 degree global warming scenario
• engagement and voting activities, with comments where managers need to improve to manage ESG risks and opportunities.

AON examined effective implementation and provided examples of an active manager that displayed excellent behaviours across both climate/carbon reporting and also voting/engagement activities and another that had best managed anti-slavery policies in its supply chain. Passive management was comfortable with responsible stewardship of capital and pushing for positive change on ESG issues for our global multi-factor equity and managed growth strategies.

Fixed income managers meet minimum ESG rating criteria and aim to improve ratings where possible. An example of engagement leading to improvement was, following an analysis of ESG risks, one manager signing up to the Principles for Responsible Investment.

For asset-backed securities, investment analysis is largely focused on downside risk rather than potential upside gains. However, ESG analysis is conducted and scored at the collateral, originator and country of domicile levels. We included the good example of a manager committing Shell to various actions, including setting climate targets and linking these targets to executive remuneration, with the UN Sustainable Development Goals (SDGs) central to their investment process.

For the DC section, the pension trustees engaged with LGIM and agreed to consider how we could better integrate ESG into the default strategy in future. We reviewed LGIM’s available ESG-tilted fund range and agreed to add the LGIM Future World Fund as a self-select option. The trustees also reviewed LGIM’s ESG and stewardship capabilities.

LGIM employ the use of Institutional Shareholder Services (ISS) as a proxy voting service, and approximately 8% of the votes cast by LGIM were against the advice of ISS over the year to 31 March 2020. The pension trustees reviewed the detail of LGIM’s activities and stated voting policies and our implementation statement includes details of some of the votes cast. Our next implementation statement for this scheme will need to include new announcements such as Legal & General’s plan to vote against FTSE 100 companies with all-white boards.

Overall, the trustees concluded we felt our managers appear to be exercising their respective voting and engagement abilities in a thoughtful, responsible manner and our stewardship policy is being appropriately implemented on our behalf, to a large extent.

We acknowledged there is still room for improvement generally within the industry and our managers still face some difficulty in getting the information needed from the companies they invest in to be able to make additionally well informed investment decisions. This exercise of reviewing manager engagement information has highlighted the importance of stewardship as an input into investment decisions.

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