A consultation paper reviewing how 'fiduciary duties' apply to investment intermediaries has been published by the Law Commission and welcomed by the National Association of Pension Funds (NAPF).

The review looks at the obligations of those in a chain of intermediaries to act in the interest of savers.

The Commission looks at how far fiduciary duties require trustees to maximise financial return over a short time scale, and how far trustees can consider other factors, such as environmental and social issues.

Regarding trust-based pensions, the Commission said that trustees may take environmental, social and governance issues into account, but they should not attempt to "improve the world in some general sense" if this is possibly at the expense of future savers.

David Hertzell, the Law Commissioner leading the project, said: "There is mounting evidence that sustainable firms that treat their customers and suppliers well do better in the long-term.

"Trustees are entitled to pick stocks on the basis of these factors, when they think that this will improve financial returns. But they should not make ethical choices that financially disadvantage savers, unless savers have given informed consent."

He also said that the pressures towards short-termism include actuarial valuations and the fact that very small schemes lack internal resources and depend on invest consultants and managers, who may recommend short-term trading because of "everyone else is doing".

The report also highlights contract-based pension providers and others in the investment chain where fiduciary duties are much less certain, because the law is uncertain.

Hertzell said: "Judge-made laws, such as fiduciary duties, cannot make up for gaps in regulation. We think that there may be gaps in the way that investment consultants and custodians are regulated, and we ask whether there is a need to review these areas."

The project arose out of the Kay Review of the UK equity market, which criticised intermediaries for excessive trading on the basis of short-term share movements , rather than investing for the long-term.

The NAPF has welcomed the Commission's effort to increase the clarity and understanding of the legal obligations arising from fiduciary duties.

Will Pomroy, NAPF corporate governance lead, said: "From our discussions with NAPF members and their advisers we are of the view that the fiduciary duties of trustees of pension plans are well understood. Trustees understand that their duty is to act in the best interests of members. There is sufficient scope under current law for trustees to take a longer-term view and consider wider factors. We welcome the recognition that a pension funds primary duty is to pay pensions.

"The Law Commission recognises that the duties on contract-based pension providers are much less certain and need reviewing. We agree, much of the apprehension concerning contract-based schemes could be addressed more directly through clear standards of conduct applicable to employers and providers in those areas in which they exercise discretion."

First published 23.10.2013

monique_simpson@wilmington.co.uk