New Rules of Engagement for Pension Trustees? – Implications of the Second Shareholders' Rights Directive

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The European Union (Shareholders' Rights) Regulations 2020 (the Regulations) transposed Directive (EU) 2017/828 (the Second Shareholders' Rights Directive) (SRD II) into Irish law.

SRD II amends the existing Shareholders' Rights Directive (2007/36/EC).

Our Corporate team provided an overview of the key amendments to the original Directive here.

The Regulations amend the Companies Act 2014 by, amongst other things, introducing transparency requirements for institutional investors, including pension schemes. Therefore, trustees of pension schemes will need to ensure compliance where their scheme's investment portfolio brings them within the scope of the Regulations, which impose criminal sanctions for breaching the relevant requirements.

Pension Schemes in Scope

The Regulations impose requirements on a "relevant institutional investor" (RII). The impact of the Regulations for any pension scheme will depend on whether it is a RII. There is a two-part test, it must:

  1. be an occupational pension scheme regulated in Ireland; and
  2. invest directly, or through an asset manager, in shares traded on an EU regulated market.

This will include schemes that invest directly or indirectly (via an "asset manager" within the meaning of SRD II) in shares of companies (including corporate investment funds) listed on EU regulated markets.

What are the New Transparency Requirements for a RII?

There are three key elements RIIs will need to address in complying with the Regulations.

1. Engagement Policy

The Regulations require a RII to develop and publicly disclose an engagement policy which must describe how the RII, amongst other things, integrates shareholder engagement into its investment strategy, monitors and conducts dialogue with investee companies, communicates with relevant stakeholders and manages conflicts of interest. The RII must also publicly disclose on an annual basis how its engagement policy has been implemented, including providing information on voting behaviour and significant votes taken.

There is a "comply or explain" provision, giving RIIs the option to publicly disclose a clear and reasoned explanation for their failure to publish an engagement policy. Asset managers have a separate obligation to produce their own engagement policy. Our Asset Management & Investment Funds team have prepared a briefing on the impact for the funds sector here.

2. Investment Strategy

The Regulations require a RII to publicly disclose how the main elements of its equity investment strategy are consistent with the profile and duration of its liabilities and how those elements contribute to the medium to long-term performance of its assets. This is similar to requirements which certain trustees are already subject to relating to the preparation of a Statement of Investment Policy Principles (SIPP) under the Pensions Act 1990. RIIs should therefore review their current SIPP to assess whether it will need to be revised in any way to address these new requirements.

3. Arrangements with Asset Managers

Where an asset manager invests on behalf of a RII, the Regulations require the RII to publicly disclose specified information regarding its arrangement with the asset manager. This includes details on how the arrangement incentivises and evaluates the asset manager's actions, as well as how the RII monitors portfolio turnover costs. The RII must provide a "clear and reasoned" explanation if it does not disclose all the required detail. Asset managers also have an obligation to disclose specified information on the arrangements in place with the RII. RIIs should review their existing arrangements with asset managers and assess what disclosures they may need to make regarding those arrangements.

Interaction with IORP II

Interestingly, Ireland transposed SRD II before IORP II. "Institutional Investor" is defined under SRD II as an IORP (i.e. a pension scheme) coming within the scope of IORP II, unless the Member State disapplied some of the provisions of IORP II for smaller schemes. Until IORP II is transposed, schemes with less than 100 members are arguably in a legal limbo with respect to their transparency obligations under the Regulations.

Where to Make Disclosures – EIOPA Comments

Currently there is no domestic guidance on how pension schemes should approach compliance. The European Insurance and Occupational Pensions Authority (EIOPA) opinion issued last year suggested that the engagement policy may be integrated into the SIPP, with the SIPP also being an appropriate place to provide a reasoned explanation for not preparing an engagement policy. Equivalent UK regulations take the approach of using the Statement of Investment Principles (SIP) to make the relevant disclosures.

In EIOPA's opinion last year on the transparency and management of environmental, social and governance (ESG) risks, it also implicitly acknowledged an overlap between SRD II requirements and the governance aspects of ESG factors. For schemes that have made progress in preparing for IORP II, any ESG policy in place should be reviewed to assess whether the governance section of that policy should be revised to deal with the new requirements imposed by the Regulations.

Conclusion

Each scheme's portfolio, scheme governance and asset manager arrangements are unique. Therefore, the appropriate approach to the Regulations will need to be considered on a scheme-by-scheme basis. If the portfolio comprises assets which come within the scope of the Regulations, then trustees may need to review their SIPP and ESG policy, if any, to assess what changes may be required to meet the new engagement policy and investment strategy obligations under the Regulations. Depending on the scheme, trustees may also need to explore what steps their asset managers have taken to address the Regulation's transparency requirements. This should help inform how trustees approach these requirements, particularly the "comply or explain" aspects of these new obligations.

Contributed by Jane Barrett of Willam Fry.