I recently gave a presentation on fiduciary duty at the SPS Local Authority Pension Fund’s Annual Investment Conference. It is an important, if rather dry subject, as depending on your standpoint it is either an obstacle to or defence against the Government’s proposed LGPS reforms. It may be helpful to share what I said in my presentation with a broader audience. I add the important caveat that I am an informed commentator, not a lawyer. I welcome views from a legal perspective.
Fiduciary duty is rooted in equity, not law
Fiduciary duty is a legal concept rooted in equity, and not common or civil law. The concept of equity goes back to Aristotle and the idea that the application of law does not always result in a fair result and sometimes needs to be adjusted. Roman law had a similar concept of aequitas.
It emerged in early British common law in respect of property. Under feudal law, the overlord had the legal right to act as wards of minors and to run their property. They often abused this power. To avoid this, the concept of ‘enfeoffment to use’ developed, where other adults took the place of the overlord, and ran the property in the minors’ interest. Another use was to allow religious orders to hold property without breaking their religious vows. However, in an important law case Henry VIII challenged their right to take his place as the overlord, packed the court with his own men, and won.
Fiduciary duty emerged as a term in the 18th century. An important 1788 judgement defined it as: “If a confidence is reposed, and that confidence is abused a court of equity shall give relief”, i.e., if a fiduciary abuses his position, the beneficiary can expect compensation from a court of equity. That is significantly distinct from common or civil law.
Do scheme managers have a fiduciary relationship?
This is firmer ground. The elements of a fiduciary relationship are:
possession of powers by the fiduciary - in the case of pensions this is the power to levy contributions and invest them.
reliance of the beneficiary on the fiduciary - most members do not have the skills or knowledge to invest for themselves.
responsibility of the fiduciary to the beneficiary - the contract between members and scheme managers.
Underlying this is a theme of unequalness – the fiduciary is in a position where he could under law be in a position to act to the detriment of the beneficiary. Fiduciary duty is there to prevent that.
Fiduciary duties
Again, this is better trodden ground. Fiduciary duties divide into two main groups.
The first is about loyalty: always acting with integrity and in the beneficiary’s interest. There will sometimes be conflicts, but the fiduciary must put the beneficiary first.
The second is about prudence: acting with care, due skill, and diligence.
Strictly speaking, only the first is a fiduciary duty. The second is part of the other statutory, equitable, and common law duties which a fiduciary may owe. But the two are often thought together as being part of fiduciary duty.
An important point is that these duties are the result of evolving interpretation and case law. They do not derive from Parliamentary legislation.
Application to pensions
My first exhibit is from the Occupational Pension Schemes (Investment) Regulations (2005) ection 4 (3).
The powers of investment, or the discretion, must be exercised in a manner calculated to ensure the security, quality, liquidity and profitability of the portfolio as a whole.”
It makes the point that pension trustees as fiduciaries must use their powers for the benefit of the entire portfolio. They should not invest unduly in specific areas. This is not of itself part of fiduciary duty, but it is the objective which trustees, as fiduciaries, should be aiming for. In my view it is a warning shot across the bows of the Government’s growth agenda, which asks pension funds to invest in specific asset classes.
Professor Kay’s 2012 review into the functioning of markets looked among other things at how fiduciary duty operated in pension funds. The key paragraphs are 9.6 and 9.21:
Fiduciary standards require that:
the client’s interests are put first
conflict of interest should be avoided
the direct and indirect costs of services provided should be reasonable and disclosed
and
“Asset holders and asset managers ought to match their advice to the risk preferences and time horizons of ultimate beneficiaries,…... they should not use their position to advance political goals or other objectives not directly related to the welfare of their beneficiaries. Their duties are to all their beneficiaries but not to savers at large…….”
He is saying that the duties of fiduciaries are to all their beneficiaries but not to savers at large. And by extension certainly not, as the Government would like, to the wider population.
However, he also recognised that clearer legal interpretation in this area was needed, and one of his recommendations was that the Law Commission review the legal concept of fiduciary duty. So, in 2014 the Law Commission produced 272 pages on the subject. The most important concept they came up with is that of trustees not ‘fettering their discretion’.
Most importantly, trustees must not “fetter their discretion”. They must genuinely consider how to achieve a pension for their members and must not simply apply a pre-existing moral or political judgement”. Law Commission Report on the Fiduciary Duties of Investment Intermediaries 2014, 6.12.
….and to the LGPS
It seems clear to me from this that the Government’s growth agenda is indeed in conflict with the fiduciary duty of pension fund trustees generally. However, the Law Commission report also pointed out that public sector pensions come under different legislation, primarily the 2013 Public Service Pensions Act, and Scheme Managers are not technically Trustees.
So, the LGPS Scheme Advisory Board (“SAB”) commissioned legal advice to clarify who owed fiduciary duty to whom in the LGPS. Nigel Giffin QC in his 2014 Opinion made it clear that he agreed with the Law Commission. He went on to say that it is possible to make investments for non-financial reasons (i.e., reasons which might not meet with the criteria above) but they must pass two important tests:
There must be no significant financial detriment
Scheme Managers must believe that members would support the investment
Following the publication of the current Government’s LGPS reform proposals, the SAB last year asked Giffin, now KC, to consider if his previous legal opinion needed to be refreshed. His Opinion was published in January 2025 (the day after the closing of the recent consultation).
He makes it clear that there has been no substantial legal change since 2014. However, he also points out that with its large parliamentary majority the Government can make substantial change to the legislation if it so wishes.
He clarifies what fiduciary duty means in practice and differentiates the duty to members and that to employers. His view is that the latter is limited to the financial consequences of making a non-financial investment.
Importantly, he says that the Government’s local agenda cannot be considered a financial investment and must therefore fall under the non-financial rules.
How does this impact the latest Government proposals?
LGPS Administering Authorities, like all pension fund scheme managers, have historically owed fiduciary duty to pension scheme members and employers. The recent consultation suggested that the act of setting the high-level investment objectives would be sufficient to fulfil this duty. However, it also set out duties to monitor the pools, much as the Authorities scrutinise fund managers under the present regime. This suggests that the Authorities do retain fiduciary duty.
There is no intention that the pools owe fiduciary duty to members. One reason is that the fiduciary duty to members has a wider scope than just investing the assets - for example the administration and payment of pensions on time. The pools do not exercise these functions. There is, however, a question whether they owe fiduciary duty to the Administering Authorities.
The key question is who pays if the investment implementation is so poor that members or employers suffer. Fiduciary duty says that they could seek redress from the fiduciaries i.e., the Administering Authorities. The latter would then have to seek compensation from the pools – who of course they own. It would be highly unsatisfactory if they foot the bill for redress for something which they have no control over.
What might happen next?
Parliament is sovereign and can change the law. However, it cannot change fiduciary duty by passing laws, only by setting a precedent through the courts. A lot depends on how much is done through primary legislation, which is harder to challenge, and how much by secondary amending legislation.
Giffin also makes the point in his recent Opinion that amending legislation will only take effect if the accompanying statutory investment guidance is also amended. His example was the recent Palestine case, where the Government retrospectively changed the 2013 Public Sector Pensions Act as a result of its defeat in the courts, but has not altered the guidance to reflect that. In respect of fiduciary duty the new investment guidance which will accompany any legislation will be an important document.
I do not expect the Government to change course. Their need for money, and their ideological (and in my view misguided) commitment to the idea that larger pension funds will be able to generate growth, is too important. If as a result fiduciaries believe their duty conflicts with the law, their only remedy will be to apply to the courts for absolution.
After the Government passes its proposed legislation, the LGPS needs legal clarity from the courts on what fiduciary duty is owed by whom to whom. That may come from a challenge, or it could be through a test case. But it must come.
The second conclusion I draw from this is at a more practical level. The separation of fiduciary duty (held by the Administering Authorities) from the power of investment (held by the pools) is concerning. As a minimum, partner funds need to find ways both to influence and to hold their pools to account. They are in most cases shareholders in their pools, but in the absence of regular public procurement the only sanction they possess for nonperformance is the nuclear one of terminating the Board. Pools and Administering Authorities will need to find more practical ways to work together to ensure that poor performance is held to account.
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