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Law Commission calls for launch of long-term investment code of conduct

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Trustees could soon be subject to a new code of conduct governing long-term investment behaviour, and should be required to disclose their approach to stewardship, according to the UK’s Law Commission.

The commission’s report, ‘Fiduciary duties of investment intermediaries’ – triggered by the 2012 Kay Review – also rejected calls to introduce a legal definition of fiduciary duties, instead drafting detailed guidance for trustees on whether they can consider factors beyond simple short-term investment returns.

In detailed guidance for pension trustees, the commission said it was not helpful for trustees to be obliged to take account of environmental, social and governance (ESG) matters, as these were often “ill-defined” and covered a number of risks.

Instead, trustees were urged to consider the risks to a company’s long-term sustainability, and weigh the impact of financial and non-financial matters against each other.

It recommended that the government amend private sector pension investment guidelines to “distinguish more clearly between financial and non-financial factors”, adding that the current mention of ESG matters should therefore be closely examined.

Additionally, it said the government should require that a scheme’s Statement of Investment Principles (SIPs) disclose whether trustees have a stewardship policy.

It also said the Pensions Regulator should seek to give the commission’s recommendations weight by promoting them and eventually incorporating them into a forthcoming code of practice.

The National Association of Pension Funds said it welcomed the “clarity and certainty” following the commission’s report.

The association’s head of investment affairs Paul Lee said: “While many pension fund trustees have always had a good grasp of their fiduciary duties to act in scheme members’ broad interests, it is extremely helpful to have the reassurance that trustees should indeed use their judgement as to what is in the beneficiaries’ interests over the appropriate time horizon.”

However, Catherine Howarth of campaign group ShareAction took issue with the decision not to introduce a statutory definition of fiduciary duty.

“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 the Law Commission acknowledges is much needed,” she said.

Simon Howard, chief executive of sustainable investment association UKSIF, said he was happy the guidance acknowledged the room for trustees to consider ESG – although the report stressed that, instead, it should be an issue of examining financial and non-financial factors.

Howard also sided with Howarth in lamenting the absence of a statutory underpinning for fiduciary duties.

“Whilst we would have liked statutory clarification on this matter, we look forward to working with the Pensions Regulator and the [Financial Conduct Authority] in ensuring they provide rapid, comprehensible and accessible guidance in this area,” he said.

The report also has implications for the UK’s forthcoming charge cap for defined contribution (DC) funds.

The 0.75% cap, which affects default funds of auto-enrolment compliant DC schemes, should be reviewed in 2017 to assess whether the cap is hampering the ability to commit to long-term investments, according to the report.

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