There needs to be a “radical re-interpretation” of savings trustees’ fiduciary duty if pension scheme assets are going to be part of the climate change solution, an influential industry figure has warned.
Writing for Professional Pensions last week, Aaron Punwani – chief executive at pensions consultancy Lane Clark & Peacock – said it was now widely accepted across the lifetime savings sector that the climate emergency requires a “massive redeployment of capital” to mitigate risk, but that for “the vast majority of UK pensions assets – the £1tr plus held by closed defined benefit schemes – the dots are not being joined”.
UK pension fund trustees are now being “inundated” with regulatory requirements to assess and report on climate risk, but Defined benefit (DB) scheme trustees have little interest or engagement in considering climate change issues beyond regulatory compliance as they increasingly move towards endgame and buyout, he argued.
“Given trustees’ responsibility to their own scheme, their primary fiduciary duty to make their own members’ benefits secure, and the fact that their holding in growth assets is both small and temporary, many trustees understandably feel that the direct impact they can realistically have on changing the outlook for climate change is limited,” he wrote.
But Punwani noted that if the fiduciary duty of trustees changed so they had to consider the lifetime of their members – including post-buyout – in their time horizon, it could bring a huge amount of assets back in scope in terms of influencing action on climate change.
“It’s becoming increasingly clear to me that if pension scheme assets are going to be part of the climate change and energy transition solution, this will require more than the current actions – we need a radical re-interpretation of trustees’ fiduciary duty, in two dimensions,” he explained.
He said the two key areas where fiduciary duty needed changing included a clarification that fiduciary duty includes consideration of members’ best financial interests over the remainder of their lifetime so that DB trustees can legitimately think beyond buyout – with the onus being placed on the trustee board to decide how much weight it wishes to place on this consideration relative to others.
Punwani said clarification that trustees may have regard to the real-world impact of their investment decisions, not just the impact that external ESG factors have on their scheme’s investments was also needed – noting this was relevant not only because those real-world impacts would take place over their members’ lifetimes, but because they will have an impact on the stability of financial systems, and thereby the security of pensions, long before the worst impacts of climate change may be felt.
The impact of change
With these fiduciary duty changes, Punwani said it could shift behaviour from being driven by regulatory reporting to a focus on real world impacts, and that would trustees would be able to look beyond the financial performance of the pool of assets they directly control. And when it came to buyout, it could also spur a shift to favour insurers who invest sustainably and commit to use their own influence to bring about positive change, he argued.
He said the changes would also influence how schemes invested in government bonds – especially if the newly interpreted fiduciary duties were to make trustees put in place conditions that the money it lends to government is used to shape a more positive future.
“My goal is simply to encourage a constructive debate on these issues,” Punwani explained. “This is not a lecture to anyone on how they should invest their pension scheme assets. But let’s be open about the fact the current trend of increasingly onerous compliance reporting requirements is not going to be of much help to the planet and society unless it is also accompanied with a re-interpretation of trustee duty to support meaningful real-world action.”
A version of this article originally appeared at Professional Pensions.
