Steering the “fiduciary duties” ship

Being a trustee of a pension scheme is a bit like being the captain of a ship: trustees are the ones steering the vessel, ensuring it stays on course to deliver a safe and secure retirement for its members, whilst adhering to key duties, laws and regulations. Of these, trustee fiduciary duties are a hot topic of discussion.

So, what are these duties?

• Duty to exercise investment powers for proper purposes

Trustees must use their investment powers to achieve the primary goal of providing pensions to members. This means avoiding detours for political motives or other unrelated reasons. The focus should always be on the financial well-being of the pension scheme beneficiaries.

Trustees’ investment duties are not, however, simply about “maximising returns”. Other factors may come into play, including the financial risks associated with climate change and other ESG factors.

• Duty to consider financially material factors

Trustees need to take into account factors that are financially material to their investment decisions. This includes assessing risks and returns that could impact the financial health of the pension scheme. For example, the physical risks of climate change and the transition to a lower carbon economy are now recognised as significant financial risks that trustees should consider.

But what about the distinction between financial and non-financial factors? Trustees must navigate this tricky stretch of water, ensuring they base their investment decisions on what is financially relevant to the scheme over the applicable time horizon. In the context of pension schemes, this may be many years. Balancing immediate financial returns with long-term sustainability goals will inevitably be context dependent.

• Duty to act with prudence

Trustees must act with the care, skill, and diligence that a prudent person would exercise when managing investments for someone else, the “prudent person” test. Essentially, trustees should make decisions as if they were morally bound to provide for someone else’s financial well-being, ensuring that their actions are in the best interest of the beneficiaries.

Prudence has always been an evolving concept, shaped by the prevailing economic and financial conditions. Just as sailing a ship on a calm and sunny afternoon is going to look very different from steering a ship through choppy, shark infested waters, what might look like a prudent decision for one scheme may well look reckless for another.

Context is everything

While the legal framework of fiduciary duties remains constant, what is permissible within this framework has been subject to change over time, and this is particularly true in the context of an ESG-focused world. Given that the world is facing a climate and biodiversity emergency, trustees are now tasked with integrating ESG factors into their investment and stewardship decision-making.

There continues to be debate as to how far trustees can go to address climate-related risks within the bounds of their fiduciary duties. Central to this debate is the extent to which trustees can consider the impacts that their investments have on the world, as opposed to just how changes in the world impact their investments.

Navigating future regulatory reforms

Looking ahead, regulatory reform could take many guises, including:

• re-defining what is meant by the “best interests of beneficiaries” (as used in applicable legislation) to include long-term sustainability factors, ensuring trustees consider the long-term impacts of their investment decisions
• recognising, at a statutory level, systemic risk as a relevant factor in trustee decision-making to encourage a holistic view of risk management, considering broader market risks and entire investment portfolios
• requiring trustees to face new duties to consider the impact of investments on communities and the environment, similar to the requirements for company directors
• moving towards compulsion or incentivisation for “productive finance”, a concept which is firmly on the Government’s agenda. Encouraging investments that contribute to economic growth and societal well-being would tie in with an ESG focus.

Nothing is yet set in stone but with a new Government keen to make its mark, trustees can expect significant changes ahead. .

If you would like any further information on the future of ESG for pensions trustees, then please do speak to your usual Sackers’ contact or get in touch directly.

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