Stewardship

General code in force: 28 March 2024

This module forms part of our expectations for trustees of those schemes required to operate an effective system of governance, see Systems of governance.

1. Stewardship provides an effective tool for encouraging, developing, and supporting behaviours and practices throughout the investment chain to ensure long-term value for savers, which can also lead to sustainable benefits for the economy, the environment, and society.
2. Effective stewardship includes – but is not limited to – the consideration of environmental, social, and governance factors (ESG) in investment decision-making and how those factors might impact the balance of risks/returns over the longer term. See Climate change.

ESG and other investment policies

3. Unless exempt¹, governing bodies are required to include their policies in relation to financially material ESG considerations, and how they are taken into account in the selection, retention and realisation of investments², in their statement of investment principles (SIP) and default arrangement SIP. They must also include their policies on the extent, if at all, to which they take into account non-financial matters (the views of members and beneficiaries, including their views on ESG matters)³. See Statement of investment principles.
4. Governing bodies are required to include in their SIP, and default arrangement SIP, their policy on the exercise of voting rights attaching to investments, unless exempt^4,5. They must also include their policy on how they monitor and engage with relevant persons, such as the issuer of the investments, about relevant matters, such as the issuer’s social and environmental impact and corporate governance⁶.
5. These governing bodies must also set out their policy on arrangements with asset managers, covering matters such as how they incentivise the asset manager to align its strategy with the scheme’s own investment policies, and to make decisions based on assessments over the medium to long term⁷.

Implementation statement (IS)

6. Governing bodies of schemes that are required to produce a SIP⁸, must produce an IS setting out how they acted on the stewardship policies set out in the SIP⁹. The IS must be included in the scheme’s annual report¹⁰ and made publicly available, free of charge, on a website¹¹.
7. In their IS, governing bodies must¹²:
   1. set out how, and the extent to which, in the opinion of the trustees, the scheme’s stewardship policies have been followed during the scheme year
   2. describe the voting behaviour by, or on behalf of, the trustees (including the most significant votes cast by the trustees or on their behalf) during the scheme year, stating any use of the services of a proxy voter
8. In addition, governing bodies of relevant schemes¹³ must¹⁴:
   1. set out how, and the extent to which, in the opinion of the trustees, the remainder of the SIP has been followed during the scheme year
   2. describe any legally required review of the SIP carried out during the year, and any review of how the SIP has been met, and explain any changes made to the SIP during the year including the reason for those changes
   3. where no legally required review was carried out during the scheme year, provide the date of the last such review

Governing bodies must have regard to statutory guidance produced by the Department for Work and Pensions on reporting through the IS.

Effective system of governance (ESOG)

9. Under section 249A of the Pensions Act 2004¹⁵, governing bodies of certain schemes must establish and operate an effective system of governance (see Systems of governance) including internal controls (see Internal controls). However, there are certain exemptions¹⁶. The system of governance must be proportionate to the size, nature, scale, and complexity of the activities of the scheme.
10. An effective system of governance should include consideration of ESG matters relating to scheme investments. These governing bodies should follow the expectations set out below.
11. Governing bodies of schemes with 100 or more members should incorporate these matters into the scheme’s own risk assessment and document them appropriately. See Own risk assessment.
12. We recommend that governing bodies with investment responsibilities follow the expectations set out below, even if they are not legally required to have an ESOG.
13. Governing bodies should:
    1. identify their rights (including voting rights) attached to investments and consider their approach to voting and engagement on relevant matters, including on ESG
    2. ensure they are familiar with their investment managers’ own stewardship policies
    3. consider investment managers’ stewardship policies as selection criteria and seek to influence them as appropriate
    4. ensure they monitor and regularly review investment managers’ stewardship practices
    5. make sure they take into account the potential long-term positive and negative impacts of investment decisions on member outcomes
    6. consider following, where appropriate, the principles set out in the Financial Reporting Council’s UK Stewardship Code
    7. seek to establish engagement approaches with investee companies and collaborative industry initiatives, whether directly or via investment managers, with a view to mitigating risks to long-term investment goals
    8. consider co-operation with other institutional investors in engaging with investee companies, for example on ESG issues

Glossary

Stewardship

The responsible allocation, management, and oversight of scheme assets – which includes shareholder voting and engagement with issuers and asset managers.

Legal references

¹ Section 35 of the Pensions Act 1995 [Article 35 of the Pensions (Northern Ireland) Order 1995] and Regulation 6 of The Occupational Pension Schemes (Investment) Regulations 2005 [Regulation 6 of The Occupational Pension Schemes (Investment) Regulations (Northern Ireland) 2005]

² Regulation 2(3)(b)(vi) of The Occupational Pension Schemes (Investment) Regulations 2005 [Regulation 2(3)(b)(vi) of The Occupational Pension Schemes (Investment) Regulations (Northern Ireland) 2005]

³ Regulation 2(3)(b)(vii) of The Occupational Pension Schemes (Investment) Regulations 2005 [Regulation 2(3)(b)(vii) of The Occupational Pension Schemes (Investment) Regulations (Northern Ireland) 2005]

⁴ Section 35 of the Pensions Act 1995 [Article 35 of the Pensions (Northern Ireland) Order 1995] and Regulation 6 of The Occupational Pension Schemes (Investment) Regulations 2005 [Regulation 6 of The Occupational Pension Schemes (Investment) Regulations (Northern Ireland) 2005]

⁵ Regulation 2A(1)(b) of The Occupational Pension Schemes (Investment) Regulations 2005 [Regulation 2A(1)(b) of The Occupational Pension Schemes (Investment) Regulations (Northern Ireland) 2005]

⁶ Regulation 2(3)(c) of The Occupational Pension Schemes (Investment) Regulations 2005 [Regulation 2(3)(c) of The Occupational Pension Schemes (Investment) Regulations (Northern Ireland) 2005]

⁷ Regulation 2(3)(d) of The Occupational Pension Schemes (Investment) Regulations 2005 [Regulation 2(3)(d) of The Occupational Pension Schemes (Investment) Regulations (Northern Ireland) 2005]

⁸ Section 35 of the Pensions Act 1995 [Article 35 of the Pensions (Northern Ireland) Order 1995] and Regulation 6 of The Occupational Pension Schemes (Investment) Regulations 2005 [Regulation 6 of The Occupational Pension Schemes (Investment) Regulations (Northern Ireland) 2005]

⁹ Paragraph 30 (1)(ca) of schedule 3 to The Occupational and Personal Pension Schemes (Disclosure of Information) Regulations 2013 [Paragraph 30 (1)(ca) of schedule 3 to The Occupational and Personal Pension Schemes (Disclosure of Information) Regulations (Northern Ireland) 2014]

¹⁰ Regulation 12 and Part 2 and Part 5 of schedule 3 of The Occupational and Personal Pension Schemes (Disclosure of Information) Regulations 2013 [Regulation 12 and Part 2 and Part 5 of schedule 3 of The Occupational and Personal Pension Schemes (Disclosure of Information) Regulations (Northern Ireland) 2014]

¹¹ Regulation 29A(1), (1A), (2A)(b) and (2B)(b) and Schedule 3, paragraph 30(1)(ca) and (f) of The Occupational and Personal Pension Schemes (Disclosure of Information) Regulations 2013 [Regulation 29A(1), (1A), (2A)(b) and (2B)(b) and Schedule 3, paragraph 30(1)(ca) and (f) of The Occupational and Personal Pension Schemes (Disclosure of Information) Regulations (Northern Ireland) 2014]

¹² Paragraph 30 (1)(ca) of schedule 3 to The Occupational and Personal Pension Schemes (Disclosure of Information) Regulations 2013 [Paragraph 30 (1)(ca) of schedule 3 to The Occupational and Personal Pension Schemes (Disclosure of Information) Regulations (Northern Ireland) 2014]

¹³ Regulation 1(2) of the Occupational Pension Schemes (scheme Administration) Regulations 1996 [Regulation 1(2) of the Occupational Pension Schemes (scheme Administration) Regulations (Northern Ireland) 1997]

¹⁴ Paragraph 30 (1)(f) of schedule 3 to The Occupational and Personal Pension Schemes (Disclosure of Information) Regulations 2013 [Paragraph 30 (1)(f) of schedule 3 to The Occupational and Personal Pension Schemes (Disclosure of Information) Regulations (Northern Ireland) 2014]

¹⁵ Article 226A of The Pensions (Northern Ireland) Order 2005

¹⁶ Section 249A(3) of the Pensions Act 2004 [Article 226A (3) of The Pensions (Northern Ireland) Order 2005]

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