With the government threatening to mandate private markets investment for DC pension schemes, Andy Lewis and Stuart O’Brien of Sackers argue that trustees’ fiduciary duty deserves a more stable, long-term legal foundation.
In 2025, pension schemes as institutional investors face an increasingly complex macro environment.
Long-term economic and geopolitical norms are under serious strain, affecting – among other things – expectations for growth, inflation, interest rates, and the security of energy and supply chains.
The UK economy needs investment, and the effects of environmental and social changes are increasingly apparent and material at global and even local levels.
It seems clear – as a matter of commercial common sense, if nothing else – that all of this could have implications for assets and portfolios, let alone for standards of living.
Yet for many years now, we have been asking ourselves, as lawyers, whether pensions law truly empowers pension scheme investors to respond effectively to the changing world. The central legal issue is often called the fiduciary duty.
An unsolved legal issue
There has been debate about the fiduciary duty for decades. It is now almost 11 years since the Law Commission’s first landmark report in this area. This analysis has been crucial, and highly influential. However, it is not legally binding in itself, and our experience as practitioners suggests there remains a genuine spectrum of opinion in the industry.
Many people have grappled with this question. There are some really good examples of innovative thinking by individual schemes, industry bodies and analysts.
We have been involved with a number of these initiatives, such as with the Impact Investing Institute and the Financial Markets Law Committee. We also give all due credit to others, such as a Legal Framework for Impact and the recent NatWest Cushon master trust opinion.
Nevertheless, the current reality is that practical action across the industry depends upon how each client and lawyer interprets the legal principles, given resources and individual risk appetites. Some, like us, tend to subscribe to a generally more expansive view. Others, for genuine reasons, may not feel able to.
This continued debate shows that there is a real unresolved legal issue here. How do you address this across an entire sector?
Legislating fiduciary duty
Legislation is the natural answer – and it appears we are not the only ones who think so. The government has included a reserve power in the Pension Schemes Bill introduced on 5 June that would enable it to set quantitative baseline targets for schemes to invest in specified asset classes: so-called ‘mandation’.
While the government has said it does not anticipate needing to use this power, and that it would be consistent with fiduciary duty, this proposal is already attracting a lot of industry comment.
“Legislative clarification would remove longstanding legal blockers and send a clear legislative signal, which would be a significant improvement over where we are now.”
Andy Lewis and Stuart O’Brien, Sackers
We believe there are other ways that legislation could be amended to empower schemes, supporting UK growth priorities and more key issues where appropriate. Such amendments could ultimately help the government meet its stated aim of not using its mandation power.
More importantly, it would enable schemes to act of their own volition in areas where there is a lack of legal clarity at present.
Investment regulations already set out a series of basic criteria that occupational pension schemes must, by law, take into account when investing. We believe that some relatively short drafting could be added to this to make it clear that it is legally safe, and even positively encouraged, to adopt certain wider considerations within this.
Legislation could tell schemes that there are additional ‘relevant factors’ that should be incorporated into investment thinking, or that may be validly incorporated if the trustees feel it is appropriate to do so.
Other areas in which it seems appropriate to provide a stronger steer are with system-level risks, such as those attributable to developments in economies or financial markets or financially material environmental or social issues, where relevant, and the time horizons trustees are allowed to look at when considering investment strategies.
Taking a wider perspective
Legislation could also make it legally safer (while not being compulsory) for schemes to take a wider perspective, looking at things like “inside-out” impacts of investments upon the wider world, members’ broader best interests, and even members’ views on investments, especially for defined contribution or collective defined contribution benefits.
This will probably appeal more to some schemes than to others. But, to be clear, trustees would still have ultimate discretion over investments under this approach.
The benefit is that legislative clarification would remove longstanding legal blockers and send a clear legislative signal, which would be a significant improvement over where we are now.
Working with industry figures and others, we have been developing potential draft legislation along the lines outlined here. The draft is being shared in various industry settings and with policymakers. We are enormously grateful for the feedback and support received so far, and the conversation continues.
Over the past few years, we have both become increasingly personally convinced that legislative clarification is necessary in this area.
Looking out at the world in 2025, it seems to us that the time for this legislation is now.
Andy Lewis and Stuart O’Brien are both partners at Sackers.
