Pension fund boards are falling behind the law courts in the way they understand their fiduciary duties and need to catch up if they are to avoid unpleasant consequences, argues pensions expert Keith Ambachtsheer.

Citing academic research by legal specialists Doug Sarro and Ed Waitzer, funded by the Rotman International Centre for Pension Management (ICPM) at the University of Toronto, he said board governance in the financial sector focused too much on “doing things right” – meaning technical compliance – rather than “doing the right thing”.

Ambachtsheer said: “In their view, this will be the basis on which their decisions and actions will increasingly be judged, both in courts of law, and of public opinion.”

Ambachtsheer is president of KPA Advisory in Toronto, as well as director of the ICPM.

He was setting out what pension boards needed to do to keep up with the evolving meaning of fiduciary duties in the 21st century, “rather than suffering the regret of having to play catch-up ball in possibly unpleasant circumstances a few years down the road”.

Listing reasons given in the academic research on why pension funds need to act now to keep up with fiduciary duty expectations, he said funds were relying too heavily on simplistic investment theories.

He said this was interfering with exercising the fiduciary duties of prudence, loyalty and impartiality.

Investment theories such as the Efficient Market Hypothesis (EMH) are elegant, he added, but the assumptions behind them do not reflect reality.

“Boards of trustees have an obligation to understand the world as it is and not as it is posited in order to create elegant investment theory,” Ambachtsheer said. 

Other reasons why pension funds need to take action on updating their understanding of fiduciary duty are the growth of the pension fund sector, the pervasive influence of consultants and money managers and emphasis on the short term, and recent legal opinions and actions that have come out in court, according to Ambachtsheer.