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Pension fund trustees' concept of fiduciary duty 'unduly narrow'

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  • Pension fund trustees' concept of fiduciary duty 'unduly narrow'

UK - Laws governing fiduciary duty must be changed to dispel "dysfunctional and inaccurate" interpretations of a trustee's obligation to maximise returns ahead of sustainable investment, a new report by UK lobby group FairPensions has said.

The report - 'The Enlightened Shareholder: Clarifying investors' fiduciary duty' - said that, despite the introduction of the UK's Stewardship Code, problems still surrounded the interpretation of fiduciary duty, with many trustees assuming fiduciaries were "absolutely barred" from considering any factors outside the financial return of an investment.

"The practical implications of this are significant," the report said, arguing that it led to a neglect of investment approaches that account for environmental, social and governance (ESG) risks that do not immediately translate into growth.

Catherine Howarth, chief executive at FairPensions, argued that their proposals to clarify fiduciary duty would simply bring the law in line with the responsibilities of company directors.

"The idea that the law requires those managing other people's money to adopt 'tunnel vision' is inaccurate and outdated, yet remains deeply entrenched," she said.

While acknowledging that a "short-termist" investment approach had been driven not only by fiduciary duty but also by regulatory restraints, the report added that a strict interpretation of financial interests put the economic wellbeing of scheme members at risk.

"For example," it said, "UK pension savers have an obvious interest in the stability and strength of the UK economy. Yet, under prevailing interpretations of the law, this cannot form part of the equation. Trustees must simply seek the best risk-adjusted returns wherever and however these are to be achieved."

The report conceded that a change to the law would not act as a silver bullet for change, but would simply address the "dysfunctional and inaccurate" interpretations that were "unduly narrow and short-termist".

It added that, with many investors reluctant to deviate from the norm when it came to investment approaches, ESG was being ignored - with FairPensions referencing the 'lemming effect' outlined by Keith Johnson, a US academic.

It added that quarterly monitoring and measuring performance against a benchmark - "widely acknowledged to be destructive" - had helped to maintain the status quo.

The recent interim Kay Review of UK equity markets, conducted by Professor John Kay, saw a number of submissions criticise quarterly reporting.

Kay himself told delegates of the National Association of Pension Funds investment conference last week that issues of engagement were often viewed simply as an additional cost by asset managers.

FairPensions stressed that any legal changes would be phrased to not be binding, using 'may' rather than 'must' - thereby avoiding additional regulatory burden and enabling trustees to employ their own judgement.

Saker Nusseibeh, acting chief executive at Hermes Fund Managers and co-signatory to a letter by Howarth on fiduciary duty published in today's Times of London, added that it was regrettable that confusion surrounding duties had continued for so long.

"It is sad to note that the dysfunction in the system has got to such a stage that we are finding it difficult to define what fiduciary duty, which is self-evident, should mean," he said.

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