How the UK government finally settled the RI fiduciary duty debate

It came in a round-about fashion, but an important debate last week in the UK House of Lords (the second UK parliamentary chamber) may have brought to an end the occasional knee-jerk response from some UK pension fund trustees that responsible investment, or the inclusion of ethics in investment, flouts trustee fiduciary duty. For the record, the UK government now believes otherwise. The resonance of its statement will undoubtedly be felt in other countries where much the same legal tussle has been taking place. The debate itself concerned plans for the introduction in the UK of a national system of low-cost, defined contribution personal pension accounts, which it is estimated will bring on stream £4-£5bn ($8-10bn) per annum in new UK pensions money from 2012. These mandatory accounts will be set up to resemble multi-employer occupational pension schemes, albeit with individual savings pots that employers can continue to pay into when they change jobs; something that has hampered previous reforms such as stakeholder pensions, which are employer based. Rumbling away throughout thediscussion for the new UK Pensions Bill that will frame the personal accounts legislation have been questions including whether ethical DC fund options can be offered – as the government intends – but also whether the trusts that are likely to administer the funds could exclude companies from pension investment over environmental, social or governance abuses. Much of this discussion has focused on the default fund where the money of pension savers not making an investment choice – expected to be as high as 85% – will be placed. A surprising earlier amendment in March this year from the UK opposition Conservative party even suggested that fund managers running personal account money should make a clear commitment to responsible investment by signing up to the UN Principles for Responsible Investment, although industry observers believe this is unlikely to make the final legislation. In a bold statement during the debate, Lord Mackenzie of Luton, who is Parliamentary Under Secretary of State for the Lords, representing the government Department of Work & Pensions, delivered a much broader statement
of support for responsible investment. McKenzie said: “In responding to this issue, I would like to take the opportunity to provide some clarification on the current operation of the law in this area. There is no reason in law why trustees cannot consider social and moral criteria in addition to their usual criteria of financial returns, security and diversification. This applies to the trustees of all pension schemes. Of course, disinvesting may not be the most appropriate approach for pension scheme trustees looking at the long-term sustainability of their investments. Engagement may be the right approach in any particular case. I hope that I have been able to put clearly on record the government’s position on responsible investment by pension schemes.” Reading between the lines, as it is often necessary to do with proposed legislation, it appears that the government does not want to polarise an ethical debate around the subject of personal pension accounts. Rather, it wishes to place responsible investment – notably the possibility for exclusions and corporate engagement – as a potential lever for all pension investment decisions. Commenting on the statement, Duncan Exley, director of campaigns at FairPensions, the UK lobby group, said: “This reinforces the growing industry consensus that responsible investment is not outside the fiduciary duties of trustees. Combined with increasing evidence that responsible investment brings performance benefits, this statement shows that trustees should be taking proactive steps to monitor and manage environmental, social and governance risks and opportunities.”
I agree, and would urge trustees not to see responsibleinvestment as merely a fallback they might have when faced with pressure from scheme members or NGOs over companies in their portfolios that have hit the headlines for poor human rights practices or some such. The UK government’s decision backs up 2005’s landmark legal opinion on responsible investment by UK law firm Freshfields. A new report, which has been dubbed “Freshfields 2” by observers, but whose working title is “Fiduciary 2” is currently being overseen by the author of the original Freshfields opinion, Paul Watchman, former Freshfields lawyer and now a partner at law firm Dewey & LeBoeuf and Carlos Joly, former senior vice president of Storebrand Investments and former co-chair of the UNEP FI Asset Management Working Group. This will look at the legal position on responsible investment across Europe and is expected early next year. The statement by the UK government will give extra ammunition to the European report and to similar debates globally. Responsible Investor was launched because we believe that investment does not exist in a moral vacuum. We also support the argument – and increasing empirical evidence – that incorporating environmental, social and governance factors (ESG) into investment can act as both risk protection and potential return boost. All those views should, of course, be tested and challenged. Nonetheless, we maintain that investors with long-term liabilities have an onus to ensure the wider economy and environment their members retire into is as important as the pension pot they accumulate. We think that constitutes fiduciary duty. After years of legal recommendations to this effect, so does the UK government.