Question time: The expanding nature of fiduciary duty

When I first became a pension trustee some 12 or so years ago, our induction included a thorough briefing on our fiduciary duty – we were to unfailingly act in the best interests of our beneficiaries.

It was sobering – and a little frightening – to think that we had a hand in the outcome of so many destinies. Nevertheless, it was relatively easily understood.

Back then for a defined benefit (DB) scheme, many of which were in deficit, the ability to reach a buyout seemed like the pinnacle of success to insure members’ benefits for the future. Our job was done! But now the situation has changed.

Paradoxically, surpluses give us many more options and so much more uncertainty about the ‘right’ way forward for our schemes.

Whenever I talk about uncertainty, someone will say that uncertainty brings opportunity as well as risk. That is true – but it means we now have a much more complicated set of decisions to make.

Understanding the scope of fiduciary duty

When we are considering the best interests of members, how do we weigh the advantage of definite security with an insurer compared to the risk and opportunity of running on for a potentially better outcome?

What if beneficiaries value security more than opportunity – just like those who chose to withdraw their whole pension pots at the beginning of pension freedoms and left the cash in the bank?

How much does our fiduciary duty require us to take note of those opinions? Where does fiduciary duty stop and paternalism begin? And if fiduciary duty is all about financial considerations, how can we calculate a ‘financial’ effect of security and peace of mind for members to set against the opportunity?

In addition, if the opportunity of running on offers potentially better outcomes, how should this be shared between sponsor and beneficiaries? Both parties are carrying risk, however ‘low risk’ an investment strategy might be.

The discussions about using surplus to enhance defined contribution (DC) benefits or to improve the capital position of the sponsor seem as if they should be the second layer of questions, once this has been resolved, and not the reason for running on.

All the right directions

In the same vein, trustees are being pointed in so many other ‘right’ directions. While the disparity between DB and DC saver outcomes is something we are all concerned about, I don’t think that means it comes before fiduciary duty considerations.

Can we find a way to meet both objectives? Using run on to benefit the financial position of the sponsor is more complicated, as its continued financial strength offsets the risk to the scheme, so can be financially material in fiduciary duty terms.

What of the calls to invest in the UK economy? Living in a thriving economy is likely to be good news for our pensioners, but clearly this shouldn’t be at the cost of lower returns and lower pensions for them personally.

Similarly, we also have a fiduciary duty around our investment for climate and nature sustainability, which are not only financially material and systemic, but also seem likely to affect lifestyle in the time horizon of our current pensioners. Effects such as increased insurance costs and heat-related health warnings are already being experienced.

How far does fiduciary duty go?

There are many decisions to be made before deciding to run on. But, if moving to buyout, is this any easier?

Is our fiduciary duty only relevant to delivering the promise to beneficiaries until the ink is dry on the insurance transaction? How far into the future should we be looking as we make this transaction?

We are obviously expected to do our due diligence on the financial security of the insurer – but does that extend also to their administration quality and their concern for sustainable investment? Is there more we can do before we actually transact?

While all trustees have the same duty to act in the interests of the beneficiaries, perhaps those who are steeped in the pensions industry are more inclined to see this in purely financial terms. Is the different ‘world view’ of member-nominated trustees the reason why I am finding this more of a conundrum than some in the pensions industry seem to be?

Whatever the answers, I suspect the list of questions are more likely to keep growing rather than reducing. That is the challenge and reward of acting as a member-nominated trustee as wide-ranging discussions on these issues come to the table.

By wrestling with these difficult questions, we can do what we are here for first and foremost: to protect the interests of our members. This is what makes being a member-nominated trustee worthwhile.

Maggie Rodger is co-chair of the Association of Member Nominated Trustees.