Trustees may face a "perfect storm" of competing tensions in relation to investment strategies amid Covid-driven regulatory and member pressures, Squire Patton Boggs has warned.

The firm's latest Pension Tension update emphasised that trustees are facing increasing pressure to improve their governance and stewardship, most notably around environmental social and governance (ESG) factors.

It stated that whilst it remains to be seen how pension scheme investments will look post-Covid and Brexit, it is possible that the pandemic may act as a ‘catalyst’ in increasing public awareness of ESG, as well as presenting new opportunities around infrastructure and recovery projects.

The update warned that lockdown has shone “an awkward spotlight on environmental and ethical issues”, noting that the emergence of new campaign groups, such as Make My Money Matter, could see scheme members scrutinising the investment activity of their pension fund.

The firm explained that tensions in relation to ESG are in turn likely to intensify as a result of both legislative and regulatory scrutiny, with The Pensions Regulator highlighting this as a key area of focus within its 2020-21 Corporate Plan.

Squire Patton Boggs added that it is also likely that trustees will need to be compliant with the recommendations of the Task Force on Climate-related Financial Disclosures for pension schemes by 2022.

The update explained that for trustees looking to formulate a strategy that balances ethics with their fiduciary duties, whilst also facing "probing member questions", it may feel an “irreconcilable challenge”.

The firm also highlighted tensions around the role of pensions schemes in rebuilding the UK economy, emphasising that whilst overseas pension schemes have already invested “significantly” in UK infrastructure projects, few UK plans have made comparable commitments.

The update explained that despite the governments plans for "ambitions infrastructure projects", there are barriers to pension fund investments within this.

Political risk was highlighted as one such consideration, especially amid Covid-19, with the firm warning that if the government wants pension funds to invest it must first “seriously look” at how it can guarantee operational risks.

Liquidity and scale were two other challenges highlighted by the firm, although it pointed out that the Local Government Pension Scheme (LGPS) is playing a 'pioneering role' in this area, with increased participation in UK infrastructure projects an explicit goal of the government's investment pooling project for the LGPS.

Squire Patton Boggs noted that good governance was "key" in resolving regulatory pressure, urging trustees to really examine their investment beliefs before they get to the stage of implementing changes, especially amid the pandemic.

It also clarified that whilst some of the challenges in this area are outside of trustee control, trustees “can and should” still focus on what they can control.

In particular, it emphasised that trustees must be clear on their legal duties and ensure they devote sufficient time to understand both existing and new investment arrangements, and ensure they align with investment beliefs.

The update clarified, however, that in the short term the priority for trustees should be updating statement of investment principles to ensure that these comply with legal requirements and good governance standards.

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