The Law Commission yesterday published its much anticipated report clarifying the fiduciary duties of trustees, and has called upon the Pensions Regulator to provide further guidance on the subject.
Last year, the commission issued a consultation paper to clarify, among other things, “how far those that invest on behalf of others may take into account factors such as social and environmental impact and ethical standards”. The answer is: to a point.
We have reported recently on schemes such as Strathclyde and the West Midlands that have made social impact investments, which may have put them in jeopardy of breaking their primary fiduciary duty of maximising returns.
The commission concluded that due to the long-term nature of the liabilities of pension schemes, trustees do not have to “maximise returns” in the short term at the expense of risks over the long term.
The report stated trustees “should take into account factors which are financially material to the performance of an investment”. And where it is thought ethical or environmental, social or governance issues are “financially material” they should be taken into account.
Last year, the commission issued a consultation paper to clarify, among other things, “how far those that invest on behalf of others may take into account factors such as social and environmental impact and ethical standards”. The answer is: to a point.
We have reported recently on schemes such as Strathclyde and the West Midlands that have made social impact investments, which may have put them in jeopardy of breaking their primary fiduciary duty of maximising returns.
@pensions_expert I don't see how it's possible to pursue 2 objectives (max risk-adj return AND max soc impact) w 1 instrument.
— E. Bartholomew (@e_bartholomew) June 19, 2014The commission concluded that due to the long-term nature of the liabilities of pension schemes, trustees do not have to “maximise returns” in the short term at the expense of risks over the long term.
The report stated trustees “should take into account factors which are financially material to the performance of an investment”. And where it is thought ethical or environmental, social or governance issues are “financially material” they should be taken into account.
The commission said that while financial return should be the primary concern, “the law is sufficiently flexible to allow other subordinate concerns to be taken into account". It concluded trustees can take into account non-financial factors, if they meet the following:
They have good reason to think scheme members share the concern.
There is no risk of significant financial detriment to the scheme.
The commission has called for further guidance. The report stated: “We accept that the law is confusing and inaccessible…Trustees are required to apply their minds to the right issues, and go through the decision in the right way, but there is no single point of reference to tell them how to do this.”
Source: Law Commission
The industry initially was not overwhelmingly positive. While responsible investment campaign group ShareAction welcomed the clarification it disagreed with the commission’s conclusion that codification would be unhelpful.
Its chief executive officer Catherine Howarth said in press-released comments: “We believe that codification in a permissive form would retain the flexibility for fiduciary duties to evolve and respect the discretion of trustees while providing the legal clarity which the Law Commission acknowledges is much needed.”
The National Association of Pension Funds said in a press statement that many pension fund trustees have always had a good grasp of their fiduciary duties, but added:
“It is extremely helpful to have the reassurance that trustees should indeed use their judgment as to what is in the beneficiaries’ interests over the appropriate time horizon”.
