Welcome to our Pensions Update for Autumn/Winter 2020.
It has been a tumultuous year, and in our newsletter, we focus on some of the current issues arising for pension schemes. A number of these themes were also explored in our recent pensions webinar, and if you would like to listen to a playback of our webinar, please click here.
If you would like to discuss any aspect of this newsletter in further detail, we would be delighted to speak with you.
Second Shareholder Rights Directive ("SRD II")
The EU (Shareholders' Rights) Regulations 2020 (the "Regulations") are in force, which transpose SRD II into Irish law. SRD II amends the existing Shareholders' Rights Directive (2007/36/EC).
The Regulations aim to increase transparency and shareholder engagement in corporate governance.
The Regulations introduced three new chapters into Part 17 of the Companies Act 2014:
- Chapter 8A (Rights of Shareholders) provides for the identification of underlying shareholders and information flows between underlying shareholders and companies;
- Chapter 8B (Transparency of institutional investors, asset managers and proxy advisors) provides new transparency obligations for these sectors with the aim of increasing transparency and shareholder engagement; and
- Chapter 8C (Remuneration Policy, remuneration report and transparency and approval of related party transactions) which provides for shareholder approval of directors; remuneration and related party transactions.
This article considers the impact of Chapter 8B on Irish pension schemes and outlines the steps to be taken by pension scheme trustees.
"Relevant Institutional Investor"
The Regulations introduce certain public disclosure requirements for Irish institutional investors. The impact of the Regulations on a pension scheme will depend on whether it is a "relevant institutional investor". In order to be considered a "relevant institutional investor", the pension scheme must:
- Be an occupational pension scheme established in Ireland and falling within the scope of the IORP II Directive, without any local law exemptions from that Directive; and
- invest directly, or through an asset manager, in shares traded on an EU regulated market.
If the pension scheme falls within the meaning of "relevant institutional investor", it will be required to:
- develop and publically disclose an engagement policy; and
- make certain disclosures in relation to investment strategy.
Public disclosure means publishing the information available "free of charge on the website of the relevant institutional investor".
Scope of Regulations
The Regulations are much less clear cut than the Directive in limiting the scope of the required disclosures to investments in shares traded on EU regulated markets. Therefore, trustees need to consider carefully the scope of their legal obligations under the Regulations.
Trustees of schemes that are caught by the Regulations are obliged to develop and disclose a shareholder engagement policy on their website. To the extent they do not do so, such trustees must provide a clear and reasoned explanation on their website as to why they have not done so.
The engagement policy must describe how the trustees integrate shareholder engagement into the pension scheme's investment strategy. It must also describe how they monitor the companies the scheme invests in on matters such as strategy, financial and non-financial performance, risk and ESG factors, how they exercise voting rights and how they engage with other shareholders and stakeholders, among other matters.
The pension scheme trustees must also report annually on their voting activity, excluding insignificant votes.
Asset managers are obliged to produce a similar engagement policy under the Regulations, and can potentially be looked to by trustees who are invested in their funds for assistance with these disclosure obligations.
Investment Strategy Disclosures
Trustees of schemes which are caught by the Regulations must also publically disclose how the scheme's equity investment strategy is consistent with the profile and duration of its liabilities, and contributes to the medium to long-term performance of its assets. While this has echoes of existing obligations under the Investment Regulations, the need to articulate and publicly disclose these matters is a new element.
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.