A new interpretation of fiduciary duty from Eversheds Sutherland argues trustees can make allocations based on investments that will improve the standard of living in retirement of a scheme’s DC members, increasing scope to opt for UK private market assets.
Launched at an event at the Mansion House today attended by pensions minister Torsten Bell, the legal opinion, which follows work it has done with NatWest Cushon, argues that fiduciary duty can extend to include opting for investments on the basis that there is a tangible causal link between investments and their ability to improve members’ standard of living in retirement.
Relevant standard of living factors reflected in the new definition include cost of living, inflation, income, GDP per capita, access to services and infrastructure. They could also include the standard of healthcare, social care, access to good quality and climate-adapted housing, food security and flood protection.
The new interpretation says it is reasonable for trustees to take these factors into account when making investment decisions. Some trustees say the opinion gives comfort for fiduciaries in the justification it gives to fiduciaries in overweighting UK investments,
Michael Jones, partner, Eversheds Sutherland said: “A key part of this opinion is to differentiate between quality-of-life factors that have been very clearly set in law as non-financial factors, and standard of living factors.
“Standard of living factors are objective – financial, quantifiable measurements of things that matter to people in terms of the goods and services that their money can buy. So it’s things like GDP per capita, levels of income, levels of infrastructure, all of those financially quantifiable aspects of life, including access to healthcare, education, services.
“Trustees need to invest with a financial objective and motive. It is not OK for trustee to say ‘we are doing this for the common good’. When looking at investment in the UK, there needs to be a tangible financial motive to that investment, and there needs to be a long-term investment horizon. So what applies to a large commercial master trust may not apply to a small defined benefit scheme that is approaching buyout.
“The tangible link is really important to withstand the Law Commission’s remoteness test. The benefit needs to accrue to the members and the fund itself.”
Julius Pursaill, a non-executive director at NatWest Cushon said: “There are two strands to the opinion. The first strand general support for any investment which can be reasonably decided will improve members standards of living in retirement. So any investment that has a positive impact on the UK economy, its vibrancy and on the tax base that underpins it. That argument relies upon, in turn, the universal owner argument. So trustees have to be confident that their decision or their decision in concert with others, for example, within the Mansion House Compact, will have a sufficiently material impact on members’ standard of living in retirement.
“The second strand is a stronger argument, where there is a direct connection between the investment decision and the member’s standard of living in the country in which they’re going to retire. The opinion says that the member’s standard of living in retirement is a financial factor. And because it’s a financial factor, not only may trustees taken into account, but they must take it into account in their investment decision making.
“We know that it is immeasurably harder if our customers are retiring into a society that doesn’t have well-functioning healthcare, well-functioning social care, doesn’t have secure and cost-effective supplies of energy and food.”
Pursaill added that the engagement value offered by UK investments could help steer members towards behaviour that would lead to better retirement outcomes.
He said: “We know from good empirical research that those emotional connections create something called task persistence. That means that members are more likely to take the difficult decisions. They will invest more time in those difficult decisions. And we also know empirically, very, very clearly that better decision-making leads to better member outcomes. So we have these two wholly independent but mutually supportive reasons for wanting to increase our allocation to UK growth assets and in particular to the types of assets I’ve talked about, which essentially means UK private equity, perhaps venture capital, UK natural capital and other forms of UK cited societal infrastructure.
“But this legal opinion is not a silver bullet for governments desire to increase allocation in listed equities, or indeed to get more companies to list on the UK market.”
Pursaill argued that while this new interpretation of fiduciary duty did not give a green light to accepting lower returns in UK investments over higher returns overseas. But it did mean that where, say, a scheme has been considering venture capital stakes in six nations around the world, including the UK, under this interpretation it could place all that capital in the UK, rather than diversify it around the world.
Ben Pollard, chief executive, NatWest Cushon said: “This opinion from Eversheds makes it much easier for trustees to take account of this virtuous circle when they’re making investment decisions.”
