The UK’s pension minister took everyone by surprise yesterday when he announced a plan to introduce new statutory guidance on fiduciary duty.
Speaking in the House of Commons, Torsten Bell said “more clarity” was needed about how trustees can and should consider systemic risks and the impact of their investments on members’ standard of living.
“There is good support for such a change across the industry,” he said.
“Actually, I heard calls for it long before I became pensions minister. And it is time that we get on with setting out more details and providing that clarity to trustees so that, rather than debating whether trustees have the ability to invest with these longer-term structural or systemic factors in mind, they can get on with doing so.”
Bell’s comments came in response to a proposal tabled by fellow MP Liam Byrne, which seeks to amend the UK’s Pension Schemes Bill to take a clearer stance on these issues.
“Pensions regulation says assets must be invested in the best interests of members and beneficiaries,” says Stuart O’Brien, a partner at Sackers, the law firm that helped draft the proposal on behalf of non-profits ShareAction, ClientEarth and the Impact Investing Institute.
“But there’s no explanation of what that means. “The proposal suggests making two additions to a planned new version of the Bill, which the government is currently trying to get approved by wider Parliament.
System-level requirement, if financially material …
The first is a statutory requirement for pension scheme governance bodies to consider “system-level” issues when making investment decisions, as well as “the reasonably foreseeable impacts over the appropriate time horizon of the assets or organisations in which the trust scheme invests upon prescribed matters, including upon members’ and beneficiaries’ standards of living”.
In both cases, the text says this would only be required when deemed financially material.
“There’s a general sense that system-level risks are not being taken seriously enough, so they need to be put into legislation to force the issue,” explains O’Brien.
“It’s the only mandatory part of the proposal, and it’s mostly just a clarification: investors ought to be thinking about the financially material effect that systemic risks may have on portfolios already.”
“From a legal perspective, these phrases are somewhat ambiguous”
Jonathan Gilmour, a partner at law firm Travers Smith
This point has caused the most consternation among critics of the proposal, according to Jonathan Gilmour, a partner at law firm Travers Smith who specialises in pension funds and sustainability.
“Where people have expressed reservations about this amendment, they’ve done so principally not because they disagree with the motivation behind it, but because they don’t consider there to be a need for the law to be changed.”
He said “systemic risks can already be captured under a pension fund’s stated investment beliefs, if they’re relevant factors for that scheme to be taking into account”.
Some funds agree.
Speaking before Parliament last year, Carol Young, the chief executive officer of the Universities Superannuation Scheme, said her pension fund had “not seen fiduciary duty as a barrier to thinking about climate change as a relevant financial factor”.
“I will go a bit further and say that we harbour a concern that if fiduciary duty were to be changed or amended or a parallel duty introduced, it might confuse more than it would clarify,” she argued at the time.
But Byrne said in yesterday’s debate there is already “confusion” about what trustees are allowed to consider.
“And from that confusion comes a caution,” he told MPs.
External impacts permission
The second part of the proposed amendment to the Pension Schemes Bill is the addition of a section permitting pension trustees to consider certain other factors that could affect the world into which members will retire.
“That’s a permissive clause, for anyone who might want to consider the external impact of their investments on communities, the environment and economic systems, which might in turn affect the standard of life of members,” acording to O’Brien.
“The thinking being that, if everyone took these issues into account, the economic system would be better for all pension members when they retire.”
The text doesn’t specify what factors are covered by the permissive component, on the basis that it should be up to trustees to decide what matters to their scheme participants.
“Some trustees won’t want to do anything with it, and they don’t have to,” O’Brien pointed out.
“Rather than hardwiring it into primary legislation, there are advantages to consulting more fully and retaining an ability to be responsive”
Torsten Bell, pensions minister
The proposal builds on legal advice produced earlier this year for Cushon, a digital pensions provider owned by NatWest.
In a document that hasn’t been publicly released, law firm Eversheds concluded it was reasonable for trustees to take scheme members’ future standard of living into account when making investment decisions.
But Gilmour believes trying to pin down the meaning of ‘standard of living’ – and of ‘system-level’ issues – will be tough.
“From a legal perspective, these phrases are somewhat ambiguous, so there will be different views taken by different advisers as to what they mean, at least until we have the opportunity to see fulsome statutory guidance, or courts provide some judicial guidance.”
Statutory guidance
And statutory guidance is exactly what Bell is now proposing.
“There is good support in the industry for providing that clarity, giving added confidence to trustees that they can invest in the long-term interests of their members and our society,” he told Parliament on Wednesday.
“[But] rather than hardwiring it into primary legislation, there are advantages to consulting more fully and retaining an ability to be responsive to future developments.”
His commitment to pursue statutory guidance, which has less legal clout than regulation, appears to focus solely on the trust-based private pensions sector.
That means it will leave out the local government pension schemes and workplace personal pensions that would be captured by Byrne’s proposal.
“The guidance will encapsulate those wider factors set out in [Byrne’s] new clause,” said Bell.
“With the goal being to provide practical support to trustees about how to comply with their existing duties in considering these factors, including what we mean by systemic risks and standards of living.”
Bell said he planned “to bring forward clarity on the next steps in a matter of months”.
But his announcement does not automatically usurp the formal proposal, which has proved popular with Byrne’s fellow MPs – having secured the support of 33 of them so far, from across five political parties.
The next step is for it to be debated in the House of Lords on 18 December, with a view to being formally tabled sometime in the new year.
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