Priorities for the UK Law Commission in Clarifying Fiduciary Duties
by Keith Johnson, Co-Chair, SFM Fiduciary Duty Working Group
A group of SFM participants and friends gathered at the offices of CCLA in London in March to review themes in comment letters that were submitted in the UK Law Commission’s consultation on fiduciary duty. To identify which concepts were viewed as being most important, the group took a straw vote. The resulting key recommendations are worth highlighting as time for anticipated release of the Law Commission’s report at the end of June approaches.
Here are the themes and priorities that rose to the top:
- Close the gap between law and practice. Recognize that lawyers who advise fiduciaries have an explicit duty to promote a full understanding of fiduciary duty principles when counseling clients, especially in regard to conflicts of interest, balancing short- and long-term goals and taking account of all relevant factors. Establish an obligation for fiduciaries to report on how they have acted upon these clarified fiduciary principles.
- Increase focus on the long term. Confirm that there is an explicit fiduciary obligation to consider the interests of all beneficiary groups, with particular attention to inter-generational issues. Include a clear duty to understand how the scheme’s investment practices affect beneficiaries, with particular attention to analyzing and protecting their long-term interests.
- Empower trustees and clarify their responsibilities. Clarify that the goal of pension schemes is to provide an appropriate and sustainable retirement standard of living. Require that trustees consider both financial and extra-financial effects of pension scheme investment strategies toward achieving that goal.
- Encourage continued evolution in improving approaches to fiduciary duties. Acknowledge that implementation of fiduciary duties must adapt to changing knowledge and circumstances. Confirm that fiduciaries have an obligation to reflect scientific advances, internationally agreed principles and societal norms in their investment practices.
- Strengthen relationships with beneficiaries. Clarify that fiduciary duties impose a positive obligation to engage in regular two-way communication with the beneficiaries to whom duties are owed. Establish that fiduciaries should recognize and favor consensus ethical views of beneficiaries over the preferences of advisors and investment managers.
- Take a holistic approach to investment management. Confirm that investment strategies and decisions often have not just economic but also systemic, environmental, quality of life, societal and well-being effects on beneficiaries over the long and short term. Recognize that fiduciaries must make best efforts to impartially align their investment practices with the interests of beneficiaries.
- Promote stewardship. Identify stewardship practices that can be practiced at all levels of fiduciary investor size. Emphasize opportunities for collaboration on issues where fiduciaries share common interests.
- Address conflicts and misalignment of interests. Mandate that all pension scheme service providers who exercise discretion on behalf of beneficiaries, or influence the exercise of discretion by trustees, must observe the same fiduciary duty standards as trustees. Extend fiduciary principles to all types of pension savings schemes, whether based on contract or trust law.
Participants in the SFM event also commented on the importance of integrating these fiduciary duty principles into the governance of pension schemes. Effective governance practices will require attention to diversity of trustee skills; two-way communication with beneficiaries and stakeholders; improved service provider selection, contracting and monitoring standards; new benchmarks that measure success across all aspects of fiduciary duty; and balanced reporting on progress toward achieving fiduciary goals.
When the UK Law Commission report on fiduciary duty is released, SFM participants will be one of many groups looking to see whether the report offers forward-looking advice to pension scheme fiduciaries that will help them meet future challenges.