The Mansion House Accord appears to have been struck with pragmatism and collaboration, but legal experts are already considering what could happen if this collegiate approach breaks down, as Bradley Gerrard reports.
Even though the ink on the Mansion House Accord is barely dry, there are already questions amid the fanfare about what happens if Westminster doesn’t see the progress it thinks it should.
Fiduciary duty is sacrosanct as it stands, although the complex concept relies partly on legislation, and partly on trust and case law.
This means the pensions industry is inevitably contemplating whether the government could mandate minimum levels of domestic investment, what barriers there might be, and whether there is genuine political will to do so.
Various legislative guardrails exist around the fiduciary duty of trustees, but rules around the predominant use of regulated markets, sparing use of derivatives, and restrictions around investing in entities linked to the sponsoring employer, are well justified.
This means efforts to mandate domestic investments for schemes would need “legitimate policy aims”, according to Michael Aherne, a partner at Herbert Smith Freehills’ pensions practice.
“We expect the government to rely on the threat of mandation to achieve its aims in the first instance and for [mandation] to be used only if there is insufficient progress.”
Michael Jones, Eversheds Sutherland
“Are there good policy reasons to say that, even in circumstances where trustees have determined that a UK-based investment is not in members’ financial interests, the government tells them to do it anyway?” he says. “I really struggle to think that the government would even contemplate that.”
Fiduciary duty and the Mansion House Accord: Members must come first, say experts
Initial reaction to the Mansion House Accord announcement was positive but with clear warnings about the overarching importance of fiduciary duty. Read more
Ability versus willingness
Rosalind Connor, a partner at Temple Bright, notes that the government could “absolutely” mandate set levels of UK-based investments because it is parliament that passes and amends legislation.
“Successive governments have really not wanted to [mandate UK investment], and for good reason, notably the political risk.”
Rosalind Connor, Temple Bright
“But if the government started forcing people to invest certain amounts in UK-based investments, when the pension scheme underperforms, people will likely claim that it’s because of those mandated investments,” she says.
“You have got to be really careful if you start legislating like this.”
Connor cites as a cautionary tale former chancellor Gordon Brown’s removal of the dividend tax credit in his 1997 Budget, which some say abolished an incentive to invest in UK shares.
“People blamed the policy for pension returns,” she says. “There were various other factors at play, but people focused on the policy, and so if something is set down in law there is nowhere [for governments] to hide.
“Successive governments have really not wanted to do it, and for good reason, notably the political risk.”
Softer approach
Both Aherne and Connor suggest that the government might instead opt for a ‘soft power’ approach, whereby legislation is passed that includes the provision for mandation but not its immediate implementation.
Other measures could include a requirement for schemes to explain why they aren’t investing certain amounts in domestic assets, or the support of a league table that showed the schemes with most British-held assets.
Michael Jones, a partner at Eversheds Sutherland, says he expects the forthcoming Pension Schemes Bill to include an “enabling power giving the government the ability to mandate” specific levels of UK investments.
“The government has the power to extend auto-enrolment but it has not enacted this power yet,” he points out.
“In this respect, we expect the government to rely on the threat of mandation to achieve its aims in the first instance and for the power to be used only if there is insufficient progress through initiatives like the Mansion House Accord.”
Herbert Smith Freehills’ Aherne says he feels the law as it stands could be “flexible enough” to allow trustees to invest a set percentage of assets in the UK, with the help of advisers to demonstrate it was financially viable.
He notes the legal opinion secured by NatWest Cushon, which essentially argues trustees can properly take into account the impact an investment has on overall living standards of scheme members, such as investing in UK infrastructure.
Potential pushback
Jones adds that if mandation did occur, trustees and providers would need a “safe harbour”.
“They would want to know they are safe from member challenge if, for example, performance is less strong than would have been obtained from a more globally focussed private markets portfolio, or costs are higher than expected because of the availability and pricing of ‘UK assets’,” he says.
Potential challenges to legal mandation could range from opposition in the House of Lords all the way through to possible claims that it breaches Article 1 of the European Convention on Human Rights, in respect of interference with property rights. In any case, the prospect of mandated levels of UK investing hinges on the success of the Mansion House Accord.
But while initial focus may be towards pension schemes and their actions, the performance of the accord’s other partner - the government - is also vital.
As Jones highlights, beyond the issues of fiduciary duty and the Financial Conduct Authority’s Consumer Duty, the Mansion House Accord is “dependent on the government’s facilitating a pipeline of UK investment opportunities”.
Bradley Gerrard is a freelance journalist.
