Statutory guidance set to clarify fiduciary duty
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The government will propose legislation to develop statutory guidance for pension trustees on taking systemic risks and living standards into account in their investment decisions, the pensions minister has said, with an intention to consult on that guidance.
An amendment to the pension schemes bill, backed by 34 cross-party MPs, was proposed that would have allowed trustees to take into account system-level considerations, along with the "reasonably foreseeable" impacts on standards of living and members' and beneficiaries' views.
The amendment had been advocated for by campaign group ShareAction, which wants to see fiduciary duty clarified to give trustees greater leeway to take sustainability into account in their investments.
An amendment to the pension schemes bill, backed by 34 cross-party MPs, was proposed that would have allowed trustees to take into account system-level considerations, along with the "reasonably foreseeable" impacts on standards of living and members' and beneficiaries' views.
The amendment had been advocated for by campaign group ShareAction, which wants to see fiduciary duty clarified to give trustees greater leeway to take sustainability into account in their investments.
Guidance will address system considerations and standards of living
At report stage on Wednesday, the pensions minister said he agrees more clarity would help. “But rather than hardwiring that into primary legislation, there are advantages to consulting more fully and retaining an ability to be responsive to future developments,” Torsten Bell said.
Instead of including the amendment, he intends to bring legislation that will allow the government to develop statutory guidance for the trust-based private pensions sector “in a matter of months”.
“The guidance will encapsulate those wider factors set out in [the] new clause, with the goal being to provide practical support to trustees about how to comply with their existing duties in considering these factors, including what we mean by systemic risks and standards of living,” Bell said.
He said the guidance is about giving trustees the ability to invest with long-term factors in mind - it will not say that they must do so.
Bell said: “I think there is good support for such a change across the industry—actually, I heard calls for it long before I became pensions minister—and it is time that we get on with setting out more details and providing that clarity to trustees so that, rather than debating whether trustees have the ability to invest with these longer-term structural or systemic factors in mind, they can get on with doing so, if they so wish.”
ShareAction welcomed the pensions minister’s announcement, saying statutory guidance is necessary, but the group wants the government to go further.
“The statutory guidance proposed by government would not apply to the whole range of pension schemes and would not provide legal clarity for schemes that wish to act on these issues,” it said.
“Furthermore, statutory guidance need not be followed and on its own is at risk of potential misuse by a future government. Now that government has agreed to change the law we need to go further than guidance alone. The pension schemes bill will pass to the House of Lords for their consideration. ShareAction will continue to push for legislation backed by statutory guidance, as proposed in Amendment NC17,” the campaigners added.
ShareAction's chief executive Catherine Howarth said amendment NC17 - proposed by Liam Byrne MP, who had worked with ShareAction on it - would allow “significant investment in the domestic economy of the UK by giving explicit legal permission to schemes to consider factors such as their members’ standards of living, members’ views, and the impacts of scheme investments when making investment decisions”.
Is fiduciary duty too narrow?
There has been ongoing debate on whether fiduciary duty as it currently stands is an obstacle to trustees making climate-related or social investments. The Financial Markets Law Committee published a paper on trustee decision-making around sustainability and climate change in early 2024.
This was followed by a non-inquiry hearing by the Work and Pensions Committee, in which practitioners and campaigners called for guidance by the Pensions Regulator. Practitioners said the current system is sufficient to address climate risks if trustees are willing to do so, but that they would welcome some guidance to give trustees comfort that they will be safe from legal claims.
The Law Commission of England and Wales published a report in 2014 which clarified that trustees may take into account non-financial concerns in their investment decisions if they have good reason to think that scheme members would share the concern, and if the decision does not create a risk of significant financial detriment to the fund.
However, the 1984 High Court case of Cowan v Scargill, often cited by pensions lawyers, still hangs over trustee decisions. The case established that “the best interests of the beneficiaries are normally their best financial interests”, and that trustees should put their own moral views to one side when making investment decisions. In Cowan v Scargill, the union-backed trustees of the Mineworkers’ Pension Fund had refused to support any overseas investments or investments in industries that compete with coal, before being defeated in court.
Some have reinterpreted the meaning of 'financial' in response to the current narrative around fiduciary duty. Earlier this year, the NatWest Cushon master trust obtained a legal opinion by Eversheds Sutherland which expands the notion of financial interests by referring to pensioners’ living standards, allowing the provider to make sustainable investments with greater legal confidence.
The current government has its own views on where trustees should invest and is even including a temporary mandation power in the pension schemes bill. It may be seeing an advantage in including systemic considerations in trustee duties, as it has been pushing for pension assets to be channelled into the UK economy and UK regions.
Earlier this year, the Local Government Pension Scheme Advisory Board received legal advice on fiduciary duty which suggests investing for economic growth should be treated as non-financial in nature. The LGPS is not under trust law, but the Law Commission in 2014 said LGPS funds fulfil similar duties to trustees in practice. The LGPS has been in a long-running power struggle with central government about how its funds can invest, leading to a Supreme Court case in 2020 and to the latest requirement to make local investments.
This was followed by a non-inquiry hearing by the Work and Pensions Committee, in which practitioners and campaigners called for guidance by the Pensions Regulator. Practitioners said the current system is sufficient to address climate risks if trustees are willing to do so, but that they would welcome some guidance to give trustees comfort that they will be safe from legal claims.
The Law Commission of England and Wales published a report in 2014 which clarified that trustees may take into account non-financial concerns in their investment decisions if they have good reason to think that scheme members would share the concern, and if the decision does not create a risk of significant financial detriment to the fund.
However, the 1984 High Court case of Cowan v Scargill, often cited by pensions lawyers, still hangs over trustee decisions. The case established that “the best interests of the beneficiaries are normally their best financial interests”, and that trustees should put their own moral views to one side when making investment decisions. In Cowan v Scargill, the union-backed trustees of the Mineworkers’ Pension Fund had refused to support any overseas investments or investments in industries that compete with coal, before being defeated in court.
Some have reinterpreted the meaning of 'financial' in response to the current narrative around fiduciary duty. Earlier this year, the NatWest Cushon master trust obtained a legal opinion by Eversheds Sutherland which expands the notion of financial interests by referring to pensioners’ living standards, allowing the provider to make sustainable investments with greater legal confidence.
The current government has its own views on where trustees should invest and is even including a temporary mandation power in the pension schemes bill. It may be seeing an advantage in including systemic considerations in trustee duties, as it has been pushing for pension assets to be channelled into the UK economy and UK regions.
Earlier this year, the Local Government Pension Scheme Advisory Board received legal advice on fiduciary duty which suggests investing for economic growth should be treated as non-financial in nature. The LGPS is not under trust law, but the Law Commission in 2014 said LGPS funds fulfil similar duties to trustees in practice. The LGPS has been in a long-running power struggle with central government about how its funds can invest, leading to a Supreme Court case in 2020 and to the latest requirement to make local investments.
