NEWSLETTER    |     March 21, 2024

Clarification of Fiduciary Duties: Still more to do?

The new Financial Markets Law Committee paper on fiduciary duty and the context of managing climate and sustainability risks does not seek to change the law. It reflects the common understanding of trustee duties. It provides some useful practical reassurances but ultimately avoids the difficult questions. Similarly, a recent Ombudsman Case provides a useful summary of trustee investment duties.

The Financial Markets Law Committee was tasked with providing clarity on what fiduciary duties require in the context of managing climate and sustainability risks. There has been some publicised concern that fiduciary duties have acted as a restraint on trustees’ ability to take action. This was highlighted in responses to the government’s call for evidence on pension trustees’ skills, capability and culture last year.

The FMLC’s comments do not detract from the generally understood legal position, which is that trustees should take a financially focused approach, that furthers the purpose of the trust, when it comes to considering sustainability and climate change factors.  It’s about both risk management and returns. In many ways, there is nothing new contained within the paper. 

It contains practical clarifications that some trustees might find helpful.  Such as:

  • trustees should take into account how their pension fund fits within the wider economy;
  • trustees should understand and manage investment risks and returns across the entire pension fund (at portfolio level and asset/investment level) by reference to applicable time horizons;
  • not all financial factors can be quantified but that does not mean they lack weight. Qualitative assessments may be just as reliable as quantitative;
  • advice should be taken and challenged; and
  • minimum compliance with legislative requirements might not fulfil a trustee’s fiduciary duties – the duty is broader than what statute requires.

There is a carefully crafted dialogue around member consultation.  It does not say that trustees need to consult or take members’ beliefs into account. Only that it could yield  advantages such as fewer complaints or greater insight.

However there are tricky areas that the paper does not address. It does not provide any detailed guidance on how trustees should address data challenges. Nor does it provide guidance on what reasonable assumptions trustees may make or how they might fill in data gaps.

Interestingly it does not delve into the difficult question of how direct the impact of the investment must on the scheme e.g. if investing to further a market transition. It side-steps this. Simply acknowledging that although economic and systemic climate related issues may have been ‘too remote and insubstantial’ in the past, this may need reappraisal as understanding develops. This is a missed opportunity to provide more clarity on a tricky area for trustees, particularly those looking to act collaboratively with other schemes. It’s likely only a question that the courts can answer.

A recent Pensions Ombudsman decision against Rowanmoor Trustees Limited (RTL) also discussed the legal investment duties owed by trustees more generally. Although the case focuses on Small Self-Administered Schemes (SSAS) in the scams context, it still helpfully sets out the duties owed by trustees. Again, it reflects common legal understanding.

Neither publication adds anything new to the discussion on fiduciary duty but they do have helpful clarifications and provide useful summaries for trustees wanting to improve their understanding.

Key takeaway

Fiduciary duty and the discussion around it is still an area to watch as certain areas require further exploration.

Register for our newsletter

Related Newsletters