28 September 2021
Download – October 2021 – 4 of 5 Insights
Pensions is, on the face of it, about retirement – which, for a lot of people, is a long way off. So why should it be in the thick of the discussion about diversity and inclusion (D&I)?
The answer is that pension schemes are worth billions and play a crucial part in the economy but also, potentially, in the companies in which they invest. Put simply, what pension schemes do with their money (and the decisions pension scheme trustees make in managing those schemes) matter. That why the UK government has been so keen to target pension schemes when it comes to legislating to tackle various issues and in some ways influencing corporate behaviour (for example, regarding climate change – see below).
Most occupational pension schemes (pension schemes that are set up under trust) have had legal reporting requirements when it comes to explaining how, if at all, they take ethical, social or environmental issues into account in their investments for some time. However, those requirements have been extended so that, putting it broadly, over the last couple of years, the trustees of affected schemes have had to explain their scheme investment policies related to financially material issues, including environmental, social and governance (ESG) considerations.
From October there will be more climate change-related measures for the largest schemes, adding to the already detailed and complex regime on ESG issues generally.
D&I issues fall squarely within the ESG bracket – how companies deal with these issues can impact their value both from a workforce and customer perspective which, in turn, can affect business generation and market value.
Indeed, D&I issues were cited by the government (in a call for evidence about pension scheme trustees' policies and practices on social factors) as being in the range of possible social factors which investors may wish to consider and which may involve financially material risks or opportunities for pension schemes. Other social factors which the document suggests fall within that bracket are customer privacy and data security (among many others).
The point is that trustees should seek to understand and manage financially material risks associated with social factors such as D&I in their investment policy and the mere fact that trustees (investors) carry out that type of analysis could, in itself, influence corporate social behaviour on ESG issues.
D&I among trustees is seen as very important for effective trustee decision making which is crucial in terms of how a pension scheme is run and invested.
Trustees are subject to legal principles when making decisions. Some of the main ones include acting in the best interests of pension scheme members for the proper purposes of the trust, and when making decisions, that they only take into account relevant factors and not irrelevant ones.
The Pensions Regulator (responsible for regulating workplace pensions), stated a while ago in one of its consultations that there is clear evidence that diverse groups are more effective at making decisions. The Regulator has set up an industry working group to help improve diversity on pension schemes boards and this year, also set out a roadmap to ensure that D&I sits at the heart of its own activity as a regulatory body.
There is no strict legal requirement to have a trustee board that is diverse and inclusive (requirements around having to have member nominated trustees are not always successful in bringing in a more varied trustee population, often because people do not step forward to fill positions). However, the drive towards promoting better decision making, arguably together with regulatory and possibly pension scheme member scrutiny, means that anything which enhances D&I should sit firmly on the trustees’ agenda.
The pensions industry has recognised just how important D&I is. For example, the Pensions and Lifetime Savings Association (a key industry body) has produced a useful guide for trustees on the issue, and NextGen (which is about promoting and encouraging the next generation of professionals in the financial services sector) published a report in May 2021, Recruiting for a cognitively diverse workforce.
D&I issues are increasingly factored into various aspects of how a pension scheme is run and must be considered not only from an investment perspective but also an internal governance point of view.
Many trustee boards already adopt measures to promote D&I. Others may need to review current practices and identify areas for improvement.
To discuss the issues raised in this article in more detail, please reach out to a member of our Technology, Media & Communications or Employment, Pensions & Mobility teams.