Squaring the circle: fiduciary duties v economic growth

This is the first in a series of blogs about the Government’s Mansion House reforms, and its goal to get pension schemes doing more for the UK economy.

Perhaps the biggest challenge to the Government’s ambition for pension schemes to drive UK growth is the humble fiduciary duty. Put simply, trustees must choose investments that they think are most appropriate for securing the purpose of the scheme. In many cases these days, this will not involve much in the way of growth assets – and what growth assets there are may be internationally diversified. Some lawyers make the case that this fiduciary duty is flexible enough for trustees to take into account the positive effect productive investment would have for their members through building a better, more prosperous society, but it would be a brave trustee who deliberately sacrificed better financial prospects for their members in favour of marginal and indirect gains from the specific investment in question.

So, how might the Government respond?

Buy British!

Mandating pension scheme investments in UK productive assets would be the most direct approach and has been much discussed. It would clearly be effective… but it is a highly controversial idea. It’s trivially true that, to the extent effective, it would involve trustees making suboptimal investments. Perhaps more seriously, it could be seen as interference with property rights or even a slippery slope towards state intervention in private investment. As a result, some argue that investor confidence could suffer. So while this option would likely direct more funds towards UK growth assets, we would be surprised if the Government took this path.

Buy British?

A less invasive approach might involve imposing a duty on trustees of pension schemes to consider the appropriateness of UK productive assets opportunities available to them. This would not mandate investments but could increase awareness of UK opportunities, highlighting emerging vehicles for productive investment. This could be framed as a reasonable quid pro quo for the very favourable tax treatment they receive, part of an overall social bargain. On the downside, this reform would add to the already very heavy regulatory burden on trustees – with no guarantee of success.

A third way?

There is an alternative that would at least not involve further burdening trustees. The law could state that trustees, when exercising their investment powers, are not deemed to have breached their fiduciary duties merely because they consider the economic impact on the UK or any part of it. This would not interfere with trustee decision making or override normal investment considerations. Instead, it would provide a safe harbour for trustees and their advisers who may be keen to explore UK or more local investment opportunities, in the same spirit that many are interested about what socially responsible investment options there are. It would also be a good complement to the Government’s voluntary compact with leading pensions providers, setting out targets for minimum holdings of unlisted UK assets in default funds.

Might such a minimally invasive option strike the right balance?

For more resources on Mansion House, please visit the Pensions Hub.