Pension trustees are neglecting their fiduciary duty if they pursue the highest possible return without considering the impact of their investment behaviour, the chief executive of Hermes Fund Managers has argued.

Rather than chase an inflation target, pension funds should aim to offer beneficiaries a certain living standard on retirement, while investing in a way that is also beneficial to the more deprived members of a society, Saker Nusseibeh said at an event organised by think tank Tomorrow’s Company.

Nusseibeh noted that pensioners were often more severely affected by price rises in key areas, such as food, energy and fuel, and said, that due to the discrepancy between the statutory inflation increase and his estimate, investors were using the wrong figure.

“The pension promise should be about delivering, 30 years down the line, a living standard that is roughly 60% of what the beneficiary enjoys today,” he argued.

“This must include soft issues such as living conditions, infrastructure, the environment – in a wider sense – as well as financial issues such as the price of food and energy.”

He said it would be an insult to pensioners if assets held by its own fund achieved a higher return, resulting in an environment where food and energy prices had risen to a level “substantially higher” than when they were in employment.

“That I would suggest is not only a dereliction of fiduciary duty even within the bounds of the current understanding of Trust Law, but in fact a form of negligence,” he said.

His comments come as the UK awaits the final recommendations by the Law Commission on the matter of fiduciary duties and, to what extent these allow trustees to invest in a sustainable fashion, rather than simply seek the highest return.

The Law Commission’s investigation was triggered by John Kay’s review of the UK equity market, which recommended a number of changes to encourage long-termism. 

Nusseibeh added: “It matters that we engage with large corporations on their behalf to maintain an infrastructure that serves the high street because, at their income level, their interaction is limited to the high street.

“It matters that we pursue sustainability because, when the system fails as it did in 2008, it is their taxes that bail it out.”

He said that if economist Milton Friedman’s theory of the neoclassical economic model – which Nusseibeh said was “a load of old cobblers” – were to be believed, the best investment would be addictive drugs, such as crack cocaine.

“Some may think I am joking, but, in 2003, a brothel called the Daily Planet was listed on the Australian Exchange. Do we really think investing in slavery and exploitation is a ‘good’ investment?”

Therefore, investors should not only think within the “dry framework” of nominal returns but also examine the “common-sense framework” of holistic, long-term returns.

“We would start to look at projects like public transport and affordable housing and healthcare through a different lens, a lens that reflects the concerns and aspirations of our beneficiaries, the capital providers,” he said.