Trustees need to be empowered with the right legal and regulatory framework to help unlock pension fund opportunities – LCP

LCP has highlighted that trustees need to be given more extensive guidance and support to invest in asset classes, which could ultimately deliver a win-win for members, sponsors, UK plc and the energy transition and managing the impact of climate change.

In their response to the DWP’s Call for Evidence on pension trustee skills, capability and culture, LCP has warned that these investment opportunities can only be maximised if trustees have the right regulatory framework and guidance to support making decisions to invest in productive assets. LCP highlights they do not believe trustees’ knowledge and understanding is a barrier to investing in complex assets such as illiquids, but rather the current regulatory framework and definition of fiduciary duty may be acting as a barrier.

In their response to the Call for Evidence, LCP is calling for new regulations that create a different risk/reward environment for DB trustees that, in turn, can be expected to support more widespread, and for longer, DB investment in productive finance.

LCP propose that a key to doing this would be to undertake a wider review of fiduciary duty to enable trustees to look beyond scheme membership to the members’ best interests over their lifetime and to allow trustees to consider the macro impact of their investment decisions in terms of the energy transition and climate change.

Other key things that LCP raised in the consultation are:

• There should be an extension of existing guidance on investment to set out how trustees should best think about “productive assets” and how to balance the different time horizons of members and risks.
• Accreditation shouldn’t be a “tick box” exercise. Any strengthening of the current accreditation schemes would need to be at a pace that could be supported by the trustee community naturally rather than rushed through.
• There should be more guidance for DC schemes on the selection and oversight of a DC pension in a Master Trust and on the valuation of illiquid assets.
• There need to be improvements from investment managers on both product offerings and transparency/disclosure with regulation to support this if necessary.
• Encouraging or requiring all employers to provide trustees (member and corporate appointed) sufficient time to fulfil their duties.

Nathalie Sims, Partner at LCP, commented, “Trustees know what they are doing. This consultation is a great opportunity to review the current regulatory framework and support provided for trustees to make the best decisions for the future of their members. The rapid growth of the Professional Trustee industry is a testament to how much demand there is to have additional support on trustee boards within the investment industry and beyond, and this growth is likely going to continue.”

Laura Amin, Partner at LCP, added: “There are exciting prospects ahead for how DB pension funds can help contribute to the wider economy, and there is a common thread across the DWP’s Calls for Evidence as DB investment in productive finance could be a win for scheme members, for sponsors, for UK plc and the government’s net zero agenda. But only provided trustees have adequate support/guidance to make these investment decisions for a sustainable future - and in this context, a rethink of fiduciary duty is warranted to enable trustees to look beyond scheme membership to the members’ best interests over their lifetime and to acknowledge the macro impact of their decisions in terms of the energy transition and climate change.”