The government has launched a consultation on draft guidance intended to give pension trustees greater clarity and confidence when considering long-term financial risks, including climate change, biodiversity loss and wider economic factors, in their investment decisions.

The Department for Work and Pensions' (DWP) consultation seeks views on guidance developed by an independent technical working group, chaired by Sir Robin Knowles, to clarify how existing fiduciary duties apply to increasingly complex investment decisions.

However, the DWP stressed that the guidance would not change existing legislation, introduce new fiduciary duties or alter trustees' legal responsibilities.

Instead, it is intended to explain how existing legal principles apply to contemporary investment challenges, including sustainability, systemic risks and long-term investment opportunities.

The draft guidance states that financially material considerations can arise at individual investment, portfolio, economic or systemic level, and may include both direct and indirect risks.

It argues that trustees should feel confident considering long-term, systemic and qualitative factors where these could affect investment outcomes, even where the risks are uncertain or difficult to quantify.

The guidance also suggests that trustees may consider how investment decisions could affect members' future living costs and the real value of their retirement income, where there is a credible financial connection.

It highlights climate change, biodiversity loss, technological developments and wider economic resilience as examples of factors that may be financially material to pension investments.

However, the government emphasised that trustees would retain discretion over which factors were relevant to their schemes, with decisions expected to be proportionate and supported by appropriate evidence and advice.

The draft also addresses investment stewardship, encouraging trustees to consider how engagement with investee companies, investment managers and other stakeholders could help manage financially material risks.

It suggests that collaboration between pension schemes and other investors may be appropriate when addressing systemic risks that individual schemes cannot effectively manage alone.

In addition, the guidance stresses the importance of robust decision-making processes, including identifying relevant considerations, assessing evidence, challenging advisers where necessary and documenting the rationale behind investment decisions.

Technical Working Group and Advisory Group chair, Sir Robin Knowles, welcomed the launch, highlighting the importance of collaboration across the pensions industry.

"Decisions on how pension funds are invested are of major consequence in the world. The importance of furthering understanding and confidence in how the law works today in this area cannot be overstated," he said.

"To that end, DWP has facilitated a remarkable collaboration of expertise and experience. In the draft guidance that has resulted, the pensions sector has shown what it can achieve together, and I hope the consultation will add to the strength of that."

Pensions Minister, Torsten Bell, also welcomed the guidance: "Every day, trustees make decisions that shape the retirement of millions of people, and they deserve clear support to make those with confidence and to ultimately deliver the best possible results for savers," he added.

Meanwhile, Arc Pensions Law partner and Association of Pension Lawyers chair, Matthew Swynnerton, praised the attempt to develop a common understanding of how established legal principles should apply to modern investment decisions, although he acknowledged that reaching agreement across the industry could prove challenging.

"The guidance isn't meant to change the legal framework but rather to help develop a consensus on how established principles apply in modern investment contexts," he noted.

"This is better for everyone than waiting years for the courts to give backwards-looking rulings after things have gone wrong."

Swynnerton warned that while pensions lawyers broadly understood the core principles of fiduciary duty, differing interpretations of how to apply them in practice have contributed to uncertainty across the market.

"Some trustees and advisers may disagree with elements of the draft guidance, and establishing consensus may be a challenge," he continued.

"That makes the consultation particularly important, as it provides an opportunity to test the approaches proposed and consider how the final guidance can best support trustees in practice."

He stressed that the final guidance would need to remain consistent with established law while reflecting the practical realities of trustee decision-making.

UK Sustainable Investment and Finance Association (UKSIF) CEO, James Alexander, also highlighted the importance of recognising systemic financial risks within trustee investment decisions.

"We look forward to trustees engaging with this consultation, which we hope can lead to greater clarity on how they apply existing fiduciary and related investment duties in practice," he added.

The DWP confirmed the guidance would initially be non-statutory, but it would consider making it statutory in future to encourage consistent use, without changing trustees' underlying legal duties.

The consultation will run for 12 weeks, closing on 28 January 2027, with the government expected to publish its response alongside the final guidance.

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