Guidance Seeks to Boost UK Pensions’ Social Grasp

Trustees and advisors are offered a voluntary framework for embedding social factors in policies and processes, as the taskforce calls for regulators to set expectations.

The Taskforce on Social Factors (TSF) has unveiled final guidance to help UK pension fund trustees improve their assessment of social factors in investment decisions and stewardship.

The taskforce was set up by the UK government’s Department of Work and Pensions (DWP) in July 2022 following a consultation on the consideration of social risks and opportunities by occupational pension schemes. Formally launched last February, the TSF issued a draft version of the guide for industry consultation in October 2023 which ran until early December.

Speaking at the launch, Luba Nikulina, Chief Strategy Officer at IFM Investors and Chair of the TSF, said “pension funds’ needs and requirements were very much at the core of our work”. Feedback from industry had been “absolutely positive”, she added. The guidance was also welcomed by The Pensions Regulator.

Nikulina led the 15-person taskforce which included representatives from pensions schemes, asset managers and data providers. Church of England Pensions Board Deputy Chief Responsible Investment Officer Stephen Barrie, a taskforce member, stressed the need for pension funds to understand and act on social factors that impact investments and outcomes.

“Failing to do so can increase risks and social injustice. From human rights to fair pay, these issues are at the heart of a flourishing society and economy,” he warned.

The TSF guide outlined the importance of pension trustees embedding social factors within schemes’ investment decisions and stewardship policies. This included an evaluation of how and why social factors are important from an investment perspective, and how taking account of these considerations aligned with pension trustees’ fiduciary duties.

The document also contained a framework to help addressing social factors in pension schemes. This included baseline, good and best practice indications, as well as a deep dive into how trustees can integrate modern slavery into their investment decision-making processes.

The guidance also included a materiality assessment framework to help evaluate portfolio exposure to social factor risks using a top-down review of the scheme’s portfolio, and a social factor data section that described the data trustees could use to manage social factors in investment.

“In recent years, the impact of social factors has been brought into sharp focus – the impact of the pandemic, growing awareness of issues such as diversity and inequality, the impact of modern slavery, health and safety, supply chain issues, and wider workforce conditions,” said Joe Dabrowski, Deputy Director of Policy at the Pension and Lifetime Savings Association and TSF member.

“The guidance marks a significant step change in the support provided to pension funds, and their efforts to better incorporate social factors into investment decisions.”

Quick start guide

Alongside the guide, the TSF’s suite of guidance included a quick start guide which Nikulina said was created in response to consultation requests to “streamline the guide even further for time-constrained people who need something quick and digestible”.

In addition, the TSF launched a data sources directory, a set of ten case studies offering examples in practice, as well as an effective stewardship, investment and advice services guide.

It has also released a set of nearly 40 recommendations for the pensions industry, government and regulators.

These recommendations said pension trustees should ensure their asset managers consider social factors and integrate them into their investment strategy and stewardship. It recommended that asset managers should be able to demonstrate their influence over social outcomes through transparent reporting on engagement, voting and investment outcomes, including any social investment metrics.

Although the guidance is currently voluntary, it included a number of recommendations to increase regulatory oversight of pension funds’ management of social risks over time.

The TSF urged the DWP to consider formally setting expectations for regulators on addressing social factors. It also called on the UK’s Financial Conduct Authority to consider setting out reporting expectations, alongside those required for environmental factors.

The recommendations said the government should continue providing the conditions for a supportive policy environment for action on social issues, as well as ensuring implementation and effective enforcement of regulation.

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