A review of how fiduciary duties impact pension funds and trustees has suggested the current legal duties appear unable to guarantee that defined contribution (DC) funds act in the best interest of members.
According to the Law Commission, the UK may also wish to consider the introduction of statutory covenants for those investing pension assets, mirroring a similar system in place in Australia.
The Commission earlier this year announced it would launch a review examining whether the current understanding of fiduciary duties stopped pension managers from committing to long-term or environmentally themed projects.
The review said it had already come to a number of tentative conclusions following debate with the industry.
Examining the importance of fiduciary duties to trust-based DC funds, it said: “It appears that, on their own, legal duties are insufficient to ensure pension schemes work in the interests of their members.
“Legal duties need to be embedded in an industry structure that provides the expertise and resources for good governance, and duties must be enforced by efficient regulation.”
The Commission also remarked that the regulatory split – whereby trust-based funds are overseen by the Pensions Regulator, while the Financial Conduct Authority monitors contract-based arrangements – could cause problems.
“This dual regulatory system allows possibilities for ’regulator shopping’, enabling providers with less capital to choose a scheme with lower prudential requirements,” it said.
It also expressed concerns that trustees in master trusts, potentially paid by the provider maintaining the scheme, may suffer from conflicts of interest and could “lack the power” to appoint a new investment manager if in-house funds were underperforming.
Addressing the potential introduction of governance committees for contract-based arrangements, recommended by the Department for Work & Pensions earlier this year, it argued that any committee should be subject to “clear legal duties to act in the interests of members”.
However, it added: ”We appreciate, however, that if members carry unlimited personal liability for breaches of those duties it may be difficult to find individuals willing to carry out the task.”
Will Pomroy, corporate governance lead at the National Association of Pension Funds, welcomed any attempts to “increase the clarity and understanding” of legal responsibilities stemming from investors’ fiduciary duty.
“The Law Commission recognises that the duties on contract-based pension providers are much less certain and need reviewing,” he said. “We agree much of the apprehension concerning contract-based schemes could be addressed more directly through clear standards of conduct applicable to employers and providers in those areas in which they exercise discretion.”
The Commission also seemed to consider the codification of fiduciary duties, noting its interest in the approach taken by Australian legislators in regulating the domestic Superannuation market.
“We note that, in Australia, fiduciary duties are set out in statutory ‘covenants’,” the consultation said.
“We are interested in whether any specific issues in the UK would benefit from similar types of statutory clarification.”
The consultation will close 22 January, and the report will be submitted to the Department for Business, Innovation and Skills by June 2014.