UK pensions minister Torsten Bell has claimed that not investing in private markets is a failure of fiduciary duty by pension funds, he said during this week’s evidence session for the Pension Schemes Bill, noting that fiduciary duty has failed to make any progress in the last 10 years.
He suggested that by not investing in private assets, pension funds have not lived up to their fiduciary duties in the past and are now making changes to do so.
Bell was responding to evidence given by Helen Forrest Hall, chief strategy officer at Pension Management Institute, and Sophia Singleton, president of the Society of Pensions Professionals, on why the proposed ‘reserve power’ to mandate pension funds should be removed from the bill.
Forrest Hall said: “The problem with ‘reserve power’ is that it doesn’t have to be used to be influencing the decisions that trustees are making about their investment strategies, because they have to consider the instances in which this power might be used and therefore they might suddenly find their long-term well considered investment strategy outwit government legislation, and that’s a dangerous place to be.”
She added that pension schemes are doing their job when they are thinking about their members and their beneficiaries and are making long-term decisions because they have the capacity to be able to do so.
She also noted that ‘reserve power’ with a 2035 sunset clause is going to impact the decisions that schemes are making at the moment.
“It will be starting to influence investment decisions, and they may be good decisions, they may not be good decisions, and they may be decisions that trustees would have made anyway. The challenge is that the reserve power exists, and a good trustee and their legal advisers would be taking account of that,” she continued.
Singleton agreed, adding that there is currently a lack of clarity on what trustees should do and take into account when investing for the long term, which makes it “very difficult” for them to carry out their financial duties.
She added that the industry is already naturally moving in the direction of investing in UK infrastructure. However, she said there is a concern that ‘reserve power’ will create market distortions.
“One of the challenges and one of the market distortions we see with things like ‘reserve power’ is you’re going to have the same group of people fighting over the same assets in a short period of time, which is going to have an impact on things like the value for money that you’re getting for those investments,” Singleton said.
Bell claimed that it is not operational barriers that prevent pension funds from doing so, but collective action.
He pointed out that the Mansion House Accord is an industry-led initiative with targets set by the industry.
“If you’ve got a collective action problem, you need to ask: how are we resolving that? You then get to the fact that the Mansion House Accord is entirely industry-led and the numbers are set by them. It’s not about distortions to the market,” he said.
Bell added that when the industry committed to private assets under the previous government, it failed to deliver because of collective action challenges.
He claimed the view put forward by Forrest-Hall and Singleton does not represent the industry as a whole but is related to individuals who are “very happy with a status quo”.
“It’s definitely a failure of fiduciary duty of the last 10 years not to have made more progress,” Bell cncluded.
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