Minister does not rule out overriding fiduciary duty as industry fears mandation

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The economic secretary to the Treasury, Andrew Griffith, is looking to the pensions industry to change what he sees as a “risk-averse culture” and has not said whether fiduciary duty will remain untouched. His comments come as the question of mandation – raised by the lord mayor of London – is rattling the pensions industry. 
 
Pension funds should help reshape a “risk-averse culture”, Griffith, who is also City minister, said in a recorded address at the Pensions and Lifetime Savings Association’s 2023 investment conference in Edinburgh on Tuesday, suggesting there is an issue with risk aversion in the UK.  
 
“It's understandable that with pots of money accumulated over a lifetime, people can be nervous about risking what they have. But I want us to be positive about taking risks and to celebrate successful risk takers; and also to recognise that without changes, there is risk in the system,” he said.  
 
“We're taking risk through risking low returns, poorer pensions and a weaker economy. But it's all of you here who have the best understanding of risks and challenges with pension schemes and who can help us out to reshape that risk-averse culture,” the former chair of the advisory board at the Centre for Policy Studies thinktank said. 
 
His comments, made just eight months after the gilts crisis of 2022, come on the back of increased policymaker, thinktank and media attention to pension fund investment as the UK economy remains sluggish. In March, chancellor Jeremy Hunt announced a Long-term Investment for Technology and Science initiative to incentivise defined contribution investment into the UK’s science and technology sector, while a new type of open-ended vehicle for illiquid assets, the Long-Term Asset Funds, has been put in place. Others want to see still more pension money in UK firms, with the lord mayor of London calling for DC investment in a Future Growth Fund to raise £50bn, controversially saying that this could be mandated.
    
Such mandation is currently not possible because of fiduciary duty in the trust space, which means the investment case drives investment decisions. Asked if the government intends to leave the fiduciary in place, Griffith did not say whether this would be the case, refraining from ruling out that the government could override the fiduciaries of a scheme. 
 
“We don't want to deliver performance for people that's below what they could have achieved with a good, diverse range of investments on the supply side," he said, adding he wants to see a vibrant economy as well.  
 
“The chancellor, the minister of pensions, myself... sit down like we do now with the industry and try and work out what are the best ways... So no definitive answer to be clear,” he added, adding that the government wants investment in growth to be appealing to pension investors.   
 
While asserting that there was no desire in government to move to an extreme position on risk, he added: “This government is on the side of those that take risk... And obviously within that, people creating wealth and becoming wealthy, in pursuit of taking genuine risks and some of those risks paying off well.” 
  
The minister’s views – and the general gist among policymakers and thinktanks to push pension funds into specific assets – did not universally enthuse a panel of pension fund representatives from the defined contribution, defined benefit and local government sectors at the event. 
 
Rachel Brothwood, executive director at the West Midlands Pension Fund, said it was fair to challenge the pensions sector about investing in the UK, since most beneficiaries live in the UK and potentially benefit from its economy, but “there has to be a case for pension funds to invest and the returns and risks do have to stack up”.
 
She said the UK is facing real social and economic challenges that will require thinking, but stressed that this should focus on the environment for pension funds to make it viable for them to invest in. 
 
Philip Brown, director of policy and external affairs at master trust the People’s Partnership, agreed it was about ensuring the environment is correct.  

“I think of it as a network effect. If you want to introduce more of a particular kind of asset into a portfolio, it's about working out what you would change in the environment. And it's difficult to say there's one thing you'd change,” he argued. 
 
UK pension funds already have a considerable home bias, said John Chilman, the chief executive of Railpen. While there has been a trend towards globalisation in institutional investment, he said that “even today, I still think UK funds [are] very much overweight to the UK”. 
 
Chilman also cautioned there could be a mismatch if closed DB schemes looking to buy out were expected to invest in venture capital, even with the Solvency II reforms. 

Spectre of mandation raises fears and some questions

 
Mandation would be the wrong way to approach the issue, the panel agreed, and a second panel at the event, consisting of chief investment officers at large pension funds, felt similarly. 
 
Elizabeth Fernando, the new investment chief at master trust Nest, said mandation of investment worried her, whether by geography or asset class. 
 
The government “should let market forces play out and trust investors will go for the best opportunities”, she said. “If those are in the UK, that is fantastic,” she added, but stressed that while Nest does not avoid the UK, it also does not favour it as a market. 
 
She noted that about 45% of Nest’s illiquid assets are invested in the UK via wind farms, solar parks and property. 
 
Fernando echoed Brothwood’s comments about the environment having to be right, saying greater certainty is key.  
 
“The one thing investors really don’t like is uncertainty. So having visibility on the regulatory regime, the returns regime, ideally inflation as well because that comes into your forecasting horizons. The more visibility and the more certainty you can get, the easier it is to commit capital,” she said. 
  
Others were more open to the idea of greater domestic investment. Richard Tomlinson, the CIO of local government pool the Local Pensions Partnership, wondered if geopolitics and climate change meant the world is now deglobalising. 
 
“I think we do need to start thinking about the domestic investment question,” he said, but noted this should be driven by the investment case, not politics. 
 
“Is it possible that more domestic investment can make sense? Is it possible that you could then end up with an improved [environmental, social and governance] characteristic for your portfolio?” he said.  
 
“Could a more domestic focus actually reduce your exposure to certain fault lines in the global economy or the political frameworks?... If through that lens you can make sense of it, it's possible that more domestic could deliver superior investment outcomes as well,” he added.  
 
However, even if some could see the case for investing in ways the government suggests, the spectre of mandation has clearly spooked the industry. 
 
One audience member warned of creeping asset nationalisation, saying: “What I think that's been proposed is borderline nationalisation of pension funds, appropriation of people's future pensions, deferred salary, and nobody's talking about the huge political shift that this represents from a free market economy to effectively a command economy.” 
 
What is your view – is the government looking for ways to override fiduciary duty? 

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