The pensions landscape is evolving at a rapid pace. This is due to many factors, and the government’s growth agenda is certainly one of them.
Better support for UK private assets is a big ambition for this government and it knows pensions are a great source of capital. It’s clear it wants more money from the country’s nest eggs to be invested in UK companies to support them.
But why aren’t more pension monies flowing into unlisted equities and UK assets in particular already? A big barrier to date has been fiduciary duty.
The problem for trustees of a pension scheme is there exists no definitive list of fiduciary duties. Instead, there is only a set of broad principles derived mainly from case law. Of course, trustees only need to make a reasonable decision, not the perfect one, but more guidance in certain circumstances can be immensely powerful.
For example, many haven’t had the confidence to allocate greater portions of their scheme’s portfolios to the UK due to a commonly held interpretation of fiduciary duty. That perception saw trustees only consider risk and return financial factors within the investment strategy in their investment decisions.
This has so far prevented many trustees from deploying more capital to UK businesses.
We worked with the law firm Eversheds Sutherland to establish what factors trustees can take into genuine consideration when it comes to making investment decisions.
The new legal opinion, on the surface, is quite simple but very powerful: standard of living factors must be taken into account by trustees.
For standard of living factors think hospitals, better medicine, improved infrastructure, a healthier economy, access to goods and services. All things that are objective, measurable and quantifiable improvements to members’ standard of living.
Now, those standard of living factors need to meet certain criteria. That means they do need to be objective, financial and quantifiable. They cannot be intangible quality of life measures.
Until now, many trustees have felt hamstrung by fiduciary guidance. They found it immensely difficult, within their existing framework and the commonly held interpretation of fiduciary duty, to take standard of living factors into consideration and so be able to invest more in UK private assets for the benefit of their members.
Of course, we went through all this trouble of obtaining a new legal opinion for a reason. We support the government in its UK growth agenda because we also believe it has the potential to deliver better member outcomes. That’s the key here.
It’s about creating emotional connections between scheme members and their investments that leads to better outcomes. That strong emotional connection can most easily be created in earnest where the assets members are investing in can be demonstrably proven to impact their lives and be a force for good.
It makes logical sense that tangible UK assets – like a pepper or solar farm – engage people more. When the infrastructure, products and services you’re investing in are on your doorstep it’s much easier to recognise the value you’re creating and benefiting from.
And when members are better engaged with their pensions it creates task persistence, which means a greater commitment and interest in their pension savings. Task persistence leads to better decisions and greater consideration of contribution levels. Altogether that means better outcomes for members, both in terms of their own pension pot and the society they retire into.
This strong legal opinion arms trustees throughout the pensions landscape in the UK with the confidence they can meaningfully consider the effect their scheme’s investments will have on their members’ standard of living. Trustees of course hold their own independent opinions on what’s best for their members and need to take their own professional advice, but the framework is now there for them to consider a wider range of investments in the UK.
Being able to complete that virtuous circle from member engagement and their investments to better outcomes will benefit pension savers, schemes, the government, and UK society as a whole.
