Stewardship for pension schemes: getting it right

The first two parts of this series explained what stewardship means in relation to pension schemes, and gave some tips for exercising stewardship in practice. This time we speak to Olivia Mooney, RI Consultant at Hymans Robertson, about how schemes can ensure that what they’re doing is up to scratch – and worthwhile.

The Pensions Regulator recently suggested that not all schemes’ stewardship is “meaningful” and that more must be done to address this situation. The government is also looking to push schemes’ engagement with stewardship requirements further: the DWP’s new guidance (see the next article in our series for a summary of key points and actions) stemmed from concerns that stewardship was an area “where existing policies and reporting were perceived to be weakest”, and was “widely misunderstood” by trustees.

The Financial Reporting Council has also noted that, while it was pleased to see investors better integrating stewardship and ESG factors into their investment decision making and identifying the outcomes of their efforts, many organisations were unsuccessful in their applications to become signatories to the Stewardship Code. Areas that came in for criticism included schemes insufficiently evidencing their approaches, failures in monitoring service providers and a lack of focus on identifying areas for improvement.

“The key to really effective stewardship is engagement – building an in-depth understanding of what managers are doing on behalf of trustees”, says Oliva Mooney.

Client expectation and regulatory requirement has led to an explosion of public disclosure on stewardship. Trustees should use this as a starting point, but then ask the questions critical to their scheme and beneficiaries to understand why certain courses of action may be being taken. This is where truly effective engagement begins. The goal should be to ensure that trustees’ views are understood by managers, and that managers become more accountable for their decisions.

Mooney cites an example of effective stewardship: “A trustee client reviewed their managers’ voting records and noted examples where one had consistently voted against proposals to address climate change and excessive executive remuneration (in contrast with other equity managers). The client used this evidence to engage with that manager to understand (and challenge) the underlying rationale. Following further monitoring, the trustee ultimately reduced their allocations with the manager and put in place expectations for changes they wanted to see over the next twelve months. Stewardship became a key factor in its appointment decisions.”

Finally, Mooney reminds schemes that time is of the essence: “We have heard the Secretary of State for Work and Pensions suggest that 2023 will be “the Year of the Trustee”, and with more guidance for trustees on stewardship having been issued in June, we believe scrutiny of trustees’ stewardship activities will only increase. Trustees that are not already meeting managers regularly need to start doing so. Engagement priorities will vary from scheme to scheme and it’s important that these are well considered by trustees and clearly communicated to stakeholders.”

Stewardship isn’t going anywhere, and schemes should prepare for their approaches – and results – to be challenged.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at July 2022. Specific advice should be sought for specific cases. For more information see our terms & conditions