Making pension scheme investment sustainable – the new rules and what do they mean in practice?


Since 1 October, the investment obligations of trustees of UK occupational pension schemes have changed. The changes are significant and likely to have a material impact on how trustees invest their estimated £1.8 trillion of assets under management and therefore on the wider investment industry.

Summary of the changes

There are a number of investment related changes affecting trustees. 

From 1 October 2019, trustees must have certain policies in place and include them in their statement of investment principle (SIP). These include policies on:

  • “Financially material considerations” over the tine required to fund future benefits from the scheme in relation to the selection, retention and realisation of investments; and
  • Stewardship including how they exercise their rights (including voting rights) and undertake engagement activities relating to the investments.

Crucially, “Financially material considerations” explicitly includes environmental, social and governance considerations, including but not limited to climate change, that the trustees consider to be financially material.

In terms of stewardship, the policy must set out how the trustees propose to engage with investment managers and companies they have invested in on matters such as performance, strategy, risks, corporate governance, social and environmental impact and the investment managers' alignment with the trustees' policies.

Additionally, defined contribution schemes must ensure their SIP is published on a publicly available website free of charge.

Changes from 2020 onwards

From October 2020 to October 2021, further obligations apply. Trustees will need to provide details of how they work with their asset managers (including how their arrangements incentivise the asset managers to align their investment strategies with the trustees' policies) and will be subject to additional disclosure obligations. For example, trustees must report on how they have implemented their stewardship policy and trustees of defined benefit schemes must also publish their SIP on a publicly available website free of charge.

Impact of the changes in practice

Prior to the changes, many trustees did not take into account environmental, social and governance (ESG) considerations when investing. Many also did not have in place a meaningful stewardship or engagement policy. This is no longer possible. 

Trustees must now develop and implement bespoke, detailed policies on ESG considerations, including climate change, where they are financially materially (i.e. where they may impact the bottom line) and on stewardship. They will also need to prepare for the further changes in 2020 and 2021. Therefore, the changes are significant and are already having a huge impact on how trustees invest and, in turn, the wider investment industry.   


A key challenge for trustees when implementing the new rules is identifying the extent to which an investment has "good" ESG characteristics. Although some progress has been made, the industry has not yet developed a consistent and standardised way of disclosing investments against ESG credentials. 

Another challenge is that many pension schemes invest in pooled funds. It is often difficult to analyse the overall ESG position of pooled funds.  Further, asset managers may be unable to implement trustees' voting position in pooled funds which makes compliance with the new stewardship obligations unworkable in this context.

Trustee guidance

Helpfully, the Pensions Regulator (TPR) has updated its investment related guidance which refers to the new duties. 

In addition, the Pensions Climate Risk Industry Group, recently set up by TPR, is to provide further guidance on how trustees should integrate, manage and report on climate risks in line with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).

Impact on the wider pensions industry and corporates

Trustees are actively working with their asset managers to assess the extent to which their investment strategy takes into account ESG considerations and identify what changes are needed. However, many asset managers are not yet in a position to meaningfully address these issues partly because they are not yet subject to similar obligations. 

The FCA has recently confirmed that new rules will be introduced in 2020 which will  require asset managers to disclose in relation to ESG considerations in line with TCFD recommendations. This should help to address the current mismatch between the different regulatory regimes and facilitate a more meaningful discussion between trustees and asset managers. 

The new rules present an opportunity for investees looking for trustee investment who have considered ESG factors and are able to present tangible evidence of how they have mitigated the risks and assessed their ESG footprint. It is important to note that trustees must also ensure they have a diversified investment portfolio. In other words, just because an investment may have an ESG associated risk, does not mean that trustees cannot invest in it.


The government and TPR have made it clear that trustees must not take a “tick box” approach to complying with the new rules. The current pensions minister has written to the largest UK pension funds demanding details of how they are complying and explaining that he intends to monitor compliance going forward. As part of its new “Clearer, Tougher, Quicker” mantra, TPR has also said that it will be monitoring closely how trustees comply with the rules. To ensure they have protected themselves against potential regulatory intervention, trustees should comply with the spirit as well as the letter of the new rules.

Further changes

Further regulatory changes are likely, particularly in relation to what is considered good practice. The concept of sustainable or responsible investment is still in its infancy and trustees will need to keep a close watch on developments.

Final thoughts

An interesting area to watch will be how scheme members contribute to further behavioural change. Recent research shows members want their investments to have a positive impact on people and the planet, as well as on the bottom line. Some have threatened legal action, with assistance from climate charities such as ClientEarth, where schemes have not addressed their questions on how ESG factors have been considered. In other jurisdictions, members have brought similar claims in the courts and it seems likely that a UK scheme member will do the same in time.

In any case, the clear direction of travel is that sustainable investment for trustees is here to stay. Trustees and the wider investment industry must step up to the challenges and make the changes required to maximise the opportunities the new rules present.


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