UK Government steps away from regulating on trustees fiduciary duties

The UK government has decided against regulating for pension trustees in order to help them distinguish between financial and non-financial factors in their investments believing that guidance now exists to assist trustees.

The announcement followed a government consultation on specific recommendations contained in a Law Commission report into the fiduciary duties of investment intermediaries that was published last year. Manifest believes that the government has taken the right approach based on providing guidance for trustees rather than regulation.

However, the UK Sustainable Investment and Finance Association (UKSIF) expressed disappointment at the decision. UKSIF said, “This was a key opportunity to raise the bar in terms of sustainable investment. Guidance from regulators is inadequate to ensure laggards provide a sufficient level of protection for scheme members and UKSIF will continue to engage with the Government, regulators and the sector on this missed opportunity.”

The Law Commission had suggested that while the pursuit of a financial return should be the predominant concern for pension trustees, the law is sufficiently flexible to allow other, non-financial concerns to be taken into account provided trustees have good reason to think that scheme members share their view and there is no risk of significant financial detriment to the fund.

Additionally, the Law Commission reported stated that the current requirements for the Statement of Investment Principles relating to “social, environmental or ethical considerations” may be unhelpful and should be reviewed in the context of helping trustees distinguish between financial and non-financial factors. In particular they considered that the regulations as they stand imply that there is scope for trustees not to consider what weight, if any, to attach to Environmental, Social and Governance (ESG) factors and ethical factors.

The Law Commission had also suggested that trustees should disclose their policy on stewardship and long term investment in companies. The government had suggested that this could be within a SIP. However, again the government has decided against this action following the consultation.
The government said that regulatory changes are not necessary as the Pensions Regulator had updated its trustee training materials to reflect the Law Commission’s conclusions about trustees’ responsibilities when making decisions about investments. The Pensions Regulator is also updating its DC code and supporting guidance with new material on investments and is incorporating the Law Commission’s findings into their investment guidance generally.

Separately, the government is asking for more information on how pension schemes currently make certain information available to beneficiaries about how the scheme makes investments, including information about their approach to stewardship and how voting rights associated with investments are used. The government is also interested in details of any changes schemes would need to make to ensure this information was made available.

The government appears to be looking for improvements across all types of pension funds in respect of stewardship and voting reporting. Coupled with better guidance and training for trustees there still seems to be scope for better ESG disclosure.

The Law Commission’s work was prompted by the 2012 Kay Review of UK equity markets which highlighted confusion about what ‘fiduciary’ duties entail and to whom they apply. In particular, it found that some investment intermediaries were interpreting their duties to beneficiaries to mean the duty to maximise short-term returns, precluding consideration of other factors, such as environmental, which could impact on the performance of the company – and the return on the investment – over the longer term.

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