I know that dashboard techies are bored by legal bores but we are at a point of political agenda with pensions that is critical not just to pensions but to the country and I am going to focus on a series of comments yesterday, I am sad that we aren’t getting much diversity in this conversation, I would like to hear from women and young people and from people who speak from the heart as much from the head. But let’s kick off with my friend John Quinlivan , responding to my blog on whether a political pension investment can be perverse

Henry, this is a critical issue. When the political genie, that is “we can control or nudge significant swathes of capital that already exists to our goals” is out of the bottle then we are all in trouble.

If the politicians are the driver for this, then so be it, when the industry becomes the driver we had better all understand the motives and consequences

Back in the day, one of my bosses invented the term “contribution holiday”, and I believe that law makers saw that there was free money in some DB schemes, and consequently hard-coded certain benefits with the consequence that certain flexibility was removed, to the long term detriment of DB.

The flexibility to use money surplus to the needs of trustees to pay pensions is the “surplus debate“. I have labelled surpluses “ephemeral” as they are an accounting accident. Truss’s disastrous economic venture has driven pensions into overall surplus but it has not made them more secure, there is less money in funded pensions to pay benefits, it’s just that benefits are accounted cheaper to pay, Which is why I find the surplus debate just another mistake which I account to pension accounting deceiving us.

Pension Oldie was picking up this thread.

I think it is important to consider the purpose behind the trustee decision is considered. Are the trustees investing to provide benefits for the members?

As Brian McKeeby pointed out yesterday the UK position is very much influenced by the 1985 case of Cowan vs Scargill where the Vice Chancellor held that the National Union of Mineworkers could not use their representation on the Trustee Board of the National Coal Board Pension Scheme to

(1) cease new overseas investment

(2) gradually withdraw existing overseas investments and

(3) withdraw investments in industries competing with coal.

All this was against the advice of the Pension Scheme’s investment committee. The Judge, Megarry VC, held the NUM trustees would be in breach of trust if they followed the instructions of the union, saying ‘the best interests of the beneficiaries are normally their best financial interests.’ So if investments of an unethical type ‘would be more beneficial to the beneficiaries than other investments, the trustees must not refrain from making the investments by virtue of the views that they hold.”

Needless to say this judgement is unpopular with political activists (and perhaps politicians) who are seeking to further their goals by influencing investment decisions.

In my very humble and unlearned position effectively all Megarry was saying was that in their role a Trustee must consider all relevant matters, ignore all irrelevant matters, take advice where appropriate but challenge that advice if necessary, and come with clean hands and without prejudice to a decision that is in the interest of the members. (why oh why does TPR’s General Code only regard acting in the interest of members worthy of point 6d. on page 10 of the .pdf version).

This entirely reconciles ESG investment where the Trustee considers it offers the best long term prospects with the Trumpian view that investment managers should not be mandated with political goals (or is he actually saying the opposite?).

I think most Trustee Boards get it, but perhaps we have to be wary of those where political objectives dominate.

I should point out that Pension Oldie is an accountant who became a lecturer in a leading UK university at the age of 21. He speaks with over 50 years of experience of the real world and is not swayed by political, legal or academic self-belief. I cannot but by persuaded by his views that there is a common sense that over rides all other senses!

Byron was blocked yesterday by some rule in “WordPress” but we have him now, responding to John and Oldie (and myself)

For a much deeper exploration of these issues I recommend a 2018 paper by David Pollard of Wilberforce Chambers which sought to explain the difficulties that arise when the duties on a fiduciary, such as a trustee or director, are encapsulated in the seductively simple formulation that he or she must ‘act in the best interests of the beneficiaries’.

Be warned – it’s 106 pages in length! An earlier “short-form” (sic) version ran to 119 pages …

Wilberforce Chambers agreed that this formulation of acting in the best interests of beneficiaries has been used in many court judgments, but they believe it runs the risk that it will (understandably) be taken literally and used out of context, by beneficiaries, in legislation, or by advisers.

A better formulation is suggested to expand the wording (to bring it more into line with company law) along the following lines:

‘Trustees (or directors) must: Broadly, exercise their powers within the terms of the trust/company constitution and for a proper purpose and for what they consider, in good faith, to be most likely to promote the success of the trust/company.’

A bit longer than the simple formulation of acting in the best interests of beneficiaries …

… But much less likely to mislead and confuse?

https://www.wilberforce.co.uk/wp-content/uploads/2017/12/Mad-Bad-and-Dangerous-to-Know-David-Pollard.pdf

A later paper by Sebastian Allen is also relevant:

https://www.wilberforce.co.uk/wp-content/uploads/2022/07/Fiduciaries-and-the-power-of-investment_By-S-Allen.pdf

Byron is very well read, to me he is worryingly well read since I have no intention of reading these lengthy papers. If the fiduciary duty of a trustee is to promote the success of the sponsoring the company then it must be aligned with that of the trustee and vice-versa. I am mystified why the two should do , other than because of the intervention of Government, most typically through regulation.

And so to Jnamdoc who had not read Byron but is responding to John Quinlivan and would I suspect support the Byron positioning that this is a matter for the trustee’s responsibilities to member and sponsor (employer).

JQ is 100% correct. This is THE critical issue. And the consequences of this political interference in the investment decisions are profound and dangerous. But the DB universe has been already operating under severe political coercion since the 2004 Act.

The actuaries just didn’t realised they were being used this way. It’s been political directioning that led 90% or so of schemes to dump growth and overload on gilts even on negative real yields (how is that ever even an investment!) and then with many multiplying that with the insanity of leveraged LDI, concentrating risk and abandoning diversification as a core tenet.

Mandation leads to Statist intervention and will ultimately lead to nationalisation of the sector (we’re half way there with 50% of private sector schemes liabilities covered by Gilts – which by the way at such concentration is the same as unfunded).

We just need the Govt to extract itself from current levels of interventionism, leave the schemes to return to investing on fundamentals. It needs to be gradual, and can be done but the rewards from an invested DB universe are enormous.

And I suspect that there is something in common with Derek Scott and the others on this thread as he finishes this conversation , bringing the same legal arguments to the table (Byron’s arguments having bee supressed by WordPress!)

Please do not think me pedantic in repeated yesterday’s conversation on today’s blog. It may be that eminent politicians and regulators will, as a result of this blog, recognise that DB investment and DC pension investment (which I consider is only shades of CDC) is a matter for trustees and not for insurers.