Fiduciary duty should not be the ‘sledgehammer’ used to crack every problem in the pensions industry, USS chief executive officer, Carol Young, has warned.

Speaking at the Pensions UK Investment Conference, Young stated that “fiduciary duty is well established. It's elegant. It stood the test of time over decades. And frankly, I think you messed with it at your peril. We were content with it as it existed”.

She therefore expressed concern that the ‘Byrne amendment’ in the Pension Schemes Bill (PSB) to require the Secretary of State for Work and Pensions to issue guidance on pension scheme trustees’ investment duties, may “complicate rather than clarify”.

The amendment proposes that the guidance may explain the meaning of ‘financially material considerations’, including environmental, social, and governance considerations, and ‘best interests of members’.

According to Young, considering systemic issues to the extent that they are material financial factors for members is already entirely compatible with that within decision making for trustees.

“I would really think that a scheme properly resourced with trustees, capable of exercising skilled judgement and properly updated on their trustee knowledge and understanding should be perfectly capable of using what exists today to make these types of complex decisions. My primary concern about the Byrne amendment was that it would actually complicate rather than clarify,” she explained.

However, fellow panellist, Sackers partner, Simon Daniel, noted that “in my experience, when you start really trying to get under the skin of the duty and to work with it today, you can quite quickly get into difficulties”.

“There are lots of issues that are obviously financially material to investing prudently and in the best interests of members. But the issue we are grappling with is that as our world changes, as our understanding of finance and investments changes, there are also other broader, deeper issues that are emerging that are maybe less obvious and yet still very relevant to the adequacy outcomes that members get at the end of the process,” he explained.

“The problem is that the legal sources that we do have are not clear about how to deal with these issues, and that's why lawyers can quite legitimately take very different views about some of them, and that's really because for a duty that is so fundamental to what trustees have to do, the sources of law are pretty limited and largely historic. And that's a problem because it means trustees don't really know where the safety net, where the legal safety nets, ends.

“So if we were to do nothing in this area, I think we would continue to see pockets of innovation in the industry… But I think collectively the industry will continue to struggle to make use of the full potential of fiduciary duty, unless we can clarify what it actually is. I would have preferred a legislative solution [as] when you're talking about problem with the law, the law is the right tool to use to fix it. [But] that's not where we're going. We'll get guidance. So pragmatically, the priority now for all of us has got to be to make sure that guidance is useful and helpful to schemes,” Daniels added.

Fellow panellist, ShareAction chief executive, Catherine Howarth, agreed that legislative clarification would have provided “the strongest and most durable legal protection for trustees”, but the commitment from government to statutory guidance “is a very constructive step, and we really welcome it”.

However, the guidance must do some “real work”, she warned.

“It must reduce uncertainty, not add to it. It must provide trustees with confidence that if they follow a robust, proportionate decision-making process in managing financially material, systemic risks, they're acting squarely within their duties. We see that the question is not whether fiduciary duty is fit for purpose in theory, it's whether trustees feel sufficiently protected to deliver on it fully in the uncertain and fast changing world that UK pension savers are living in and will retire into,” she explained.

---