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Pension fund trustees guidance – draft

Published 5 November 2026

Pension fund investment: fiduciary and related duties of trustees

1. Trustees of trust-based occupational pension schemes have fiduciary and related duties when investing the pension fund. The purpose of this guidance is to assist and support trustees in understanding and complying with those duties. It responds to calls for clarification of trustees’ fiduciary duties and how they work in practice.

2. The guidance is provided by HM government. Its preparation has involved a collaboration of expertise and experience across the pension fund sector.

3. The guidance does not introduce new duties or alter existing legal obligations. It is intended to reflect the law as it is. However, responding to the calls referred to, it seeks to provide increased clarity in and confidence about what the law in practice requires and permits in today’s circumstances. It is designed to assist trustees in applying legal principles to contemporary investment questions, and to be used by them in making well-informed investment decisions.

4. In this, the guidance builds further on the paper published by the Financial Markets Law Committee dated 6 February 2024 on Pension Fund Trustees and Fiduciary Duties. The guidance complements regulatory guidance, including the General Code of Practice issued by The Pensions Regulator. It includes explanation of key existing legal concepts relevant to investment decision-making, including:

• acting in “the best interests of members”
• taking account of “financially material considerations”

These are each referred to in regulations 2 and 4 of the Occupational Pension Schemes (Investment) Regulations 2005 and the corresponding Northern Ireland provisions in regulations 2 and 4 of the Occupational Pension Schemes (Investment) Regulations (Northern Ireland) 2005.

5. The guidance is designed to be read and used as a whole, and as a convenient point of reference in any legal or regulatory context, including where a decision or proposed decision is being considered, made, explained or challenged.

6. The guidance has to cover a relatively large subject area, but it tries to do so as concisely as possible. It should not be approached as a document that adds to the volume or complexity of process, but as one that enables process to be more informed and targeted in the interests of better decision making. The time required in one relevant aspect may increase, but the time required in another aspect may reduce. Where additional time or thought is required, the guidance seeks to show why that is of benefit. Proportionality is emphasised throughout, and it is recognised that the size and circumstances of schemes differ across the sector.

7. Whilst directed to trustees, the guidance is relevant to others who have duties when the pension fund is invested, including those who support trustees with professional advice and services both within a scheme and from outside. The guidance is not a substitute for professional support and of course there will always be a limit to guidance; it can never cover every situation. However, trustees will generally be assisted where the guidance is understood and used across the investment function, and where professional support has regard and reference to the guidance.

8. The guidance is directed to trust-based pension schemes.  Those working with other pension schemes may also find parts of the guidance useful because it is directed to good decision-making by pension schemes when investing the pension fund. However, the guidance has not been drafted with all aspects of other pension schemes specifically in mind.

9. The guidance does not ask that trustees undertake a wholesale revision of existing work, and nor is its purpose to challenge approaches that trustees may have used until now. It is designed to support trustees in their work ahead, on a schedule that is practical and workable in the context of their particular scheme. The guidance may also support the sector as a whole to develop further practical approaches and supplement the guidance. There is room for complementary work from the sector to assist in implementing the guidance.

10. As a practical document for trustees, the guidance itself does not contain references or footnotes. For concision, it uses the term “pensions” to describe pensions and other benefits together and the term “members” to describe members and beneficiaries together.

11. The guidance is accompanied by a short annex of examples. These are illustrative only and not designed to be comprehensive. Trustees should consider this guidance and their duties in the context of their particular scheme and its members, recognising the broad range of schemes and their various differing circumstances.

Duties of pension fund trustees in the context of investment

12. In law, the trustees of a pension fund are “fiduciaries”. This is because they have “undertaken to act for or on behalf of another [here, the members] in a particular matter in circumstances which give rise to a relationship of trust and confidence”, or “loyalty”.

13. The law imposes “fiduciary duties” on trustees “as a reaction to particular circumstances of responsibility assumed by one person in respect of the conduct of the affairs of another”.

14. In these circumstances the pension fund trustees have a duty to “promote” (strive to achieve) the purpose of the trust and to use their powers properly and lawfully in order to do that. As they make decisions in the conduct of the affairs of the trust, pension fund trustees have a fiduciary duty to put the trust and the interests of the members first, to the exclusion of their own interests. This includes in investment decision-making.

15. The duties of pension fund trustees include duties requiring care and prudence when investing the pension fund and in reaching investment decisions. Regulations include related requirements that investment powers are to be exercised in a manner calculated to ensure the security, quality, liquidity and profitability of the portfolio as a whole.

16. The law comprises legislation, regulation, and precedent (decisions of the courts), but also legal principle. The courts apply these to a particular set of circumstances. There are plenty of sets of circumstances today that are not the subject of a legal precedent. That does not mean that there is no law; it means simply that there has not yet been a decision of the courts on a set of circumstances. This is unsurprising; the possible sets of circumstances today are many, sometimes complex, and sometimes new. Importantly, understanding of investment continues to develop.

17. Key legal principles reflected in this guidance include duty, purpose, responsibility, proportionality, reasonableness, proper process and judgment. Each has its context, but taken together the legal principles support the following summary, explained further in the body of this guidance:

• Pension fund trustees have fiduciary and related duties. They must use their powers properly and lawfully and put the interests of the trust and members first. The pension fund is to be invested in “the best interests of members” (addressed in Section C below).
• The purpose of the pension trust is to pay pensions over time to members. Trustees should therefore consider the interests of members until the end of the relevant period in which their pensions are to be paid. This will include consideration of the longer-term consequences of investment decisions on the fund over the period they consider necessary to fund pensions. Trustees are likely to have to work with multiple time horizons, including the shorter-term and the long term. The long term includes the lifetime of the scheme and the lifetime of members.
• When trustees make an investment decision, relevant matters are to be taken into account and irrelevant matters are not to be taken into account. Trustees are making investment decisions when investment beliefs, principles and strategy are set, when investment advisers and managers are chosen and their mandate is agreed, and (in the context of their role) when investment criteria are chosen and investments are made, and while investments are held.
• An investment decision should be informed by evidence, analysis and advice and should be made carefully. Trustees, managers and advisers should consider together what is most useful to trustees in the process, and trustees should be ready to make requests for information and advice and to challenge. Having identified relevant matters, the trustees will then weigh them to reach a balanced decision. In weighing relevant matters and making an investment decision, trustees are making a judgment; different boards of trustees may reach different decisions in the same circumstances.
• Trustees are entitled to take a practical and proportionate approach throughout, having regard to the circumstances of their scheme.
• “Financially material considerations” (addressed in Section E below) are relevant matters. Trustees must identify and take account of “financially material considerations”. These include considerations that are reasonably capable of affecting risk, return, outcome or opportunity in the context of the investment of the fund and achieving its purpose.
• Financially material considerations may be direct or indirect, certain or uncertain, quantitative or qualitative, and may arise at investment, portfolio, system or economy level. Where proportionate, trustees will need to consider system-level risks and opportunities where these are or may be financially material to the fund. Pension funds are participants in wider financial and economic systems. Investments may both be affected by, and contribute to, developments in those systems, among them developments related to climate, economies, inequality and technology.
• Some “non-financial matters” (addressed in ‘non-financial matters’) are also capable of being relevant but the circumstances in which they arise are limited. Where a “non-financial matter” does arise, trustees should consider taking advice about the approach to be followed.
• Stewardship is also part of investment decision-making. Trustees should consider how the rights and influence arising from their investments can be used, directly or through their investment managers and others, and including by engagement with investees and others, to manage financially material risks and opportunities and protect and enhance long-term value for members.
• Where appropriate, trustees may act collectively with other investors and stakeholders. Where a financially material risk or opportunity has a system-level dimension, and effective action cannot reasonably be achieved by the pension fund acting alone, trustees may consider proportionate forms of collaboration, engagement or collective action where this serves the interests of the pension fund and its members.
• The views of members may inform trustees’ understanding, but investment decisions remain the responsibility of the trustees, who must act in the best interests of members as a whole.
• Where trustees follow and evidence a careful and proper decision-making process, taking account of all relevant matters, they can be reassured of the robustness of their decision in legal terms.

18. Trustees have a position of responsibility. They are expected to undertake a reasonable, proportionate and well-governed process. They are not asked to demonstrate that they have systematically considered every conceivable factor in every investment decision.

“The best interests of members”

19. The “best interests of members” of a pension scheme are served through the fiduciary and related duties of the trustees. The starting point is the purpose of the pension fund trust, which is to use the assets of the pension fund to pay pensions over time to its members, for example, to people, at later points in their lives.

20. The trust is concerned with all members, rather than some. The “interests of members” are their interests as members of the pension scheme, rather than in some other capacity.

21. In the case of a potential conflict of interest, the “best interests of members” means in the sole interest of members. The best interests of members are still to be served even where those interests are shared by a wider group that also includes non-members.

22. Trustees could be expected to have a reasonable understanding of the composition of the membership. They will keep in mind where relevant that different members will be in different situations. As examples, single-person households do not share the fixed costs of housing and living that a couple household divides between 2 people, and inequalities are experienced from, for example, gender and ethnicity.

23. The purpose of investment of the fund is not simply to increase the value of the assets regardless of what will be needed and by whom and when. From the vantage point of the “interests of members”, investment goes beyond the single dimension of the level of return from an investment in the short-term. The consequences of the investment, which may include longer-term risk caused by it to the fund, or longer-term return as a result of the investment, are also relevant.

Investment decisions

24. In broad outline only, day-to-day decisions on specific investments are generally required to be taken by an investment manager authorised by the Financial Conduct Authority. Again, in broad outline, more strategic investment decisions are for trustees, usually with the benefit of written advice from a suitably qualified person. Realistically, in many cases trustees will only be able to follow an investment approach where they have professional advice supporting it.

25. The trustees, and their performance of their duties, are nonetheless central to achieving investment decisions that are in “the best interests of members”. Investment decisions are not confined to a decision to make or decline a specific investment. Rather, investment decision-making is involved at all stages, including these:

• setting investment beliefs, principles, policies and strategy
• engaging advisers and investment managers and investment consultants, including setting mandates and performance objectives
• strategic asset allocation, and considering investment research and analysis
• overseeing portfolios, and ongoing reporting, monitoring and review
• exercising stewardship
• generally, delegating where required or permitted

26. Investment decision-making is also involved when, for example, the decision is whether to transfer to a master trust or to agree to a transaction that will see a “buy-in” and “buy-out” involving an insurer.

27. When trustees make an investment decision, they do not guarantee the results. Their decision involves making a judgment, informed by evidence and analysis. All relevant matters are to be taken into account, and irrelevant matters are not taken into account. They are entitled to take a practical and proportionate approach. They are not required to take time on matters that are of minimal relevance; they are required to take time on the most relevant areas. This guidance is designed to help trustees recognise and take into account what is relevant so that decisions are properly made.

“Financially material considerations”

28. What are termed “financially material considerations” are relevant to investment decisions for all pension schemes. A consideration will be financially material where it is reasonably capable of affecting risk, return, outcome or opportunity in the context of the investment of the fund and achieving the purpose of the trust (to pay pensions over time to members).  The magnitude or likelihood of effect may differ as between considerations.  Effects may not be confined to a single investment or asset class and can extend to the whole fund and to its purpose.

29. Trustees should have confidence that they can consider long-term, systemic and qualitative financially material considerations. More things are capable of being financially material considerations than may have appeared to be the case in the past. A consideration may be financially material in some contexts but not in others, and whether it is and the degree to which it is financially material could change over time. Identifying a new financially material consideration or a change in financial materiality enables better decisions for the future; it does not follow that past decisions will have been inappropriate when made where based on reasonable judgment and proper process at the time.

30. There is, however, no requirement for disproportionate or impractical work to be undertaken. What matters is that trustees undertake a reasonable process that is approached and applied consistently and objectively as between the various financially material considerations and in the circumstances of the fund. An understanding of what is financially material in the circumstances of the fund can be informed by discussion with the help of advisers and by enquiry of managers or investees. Where an issue is of only minimal relevance, there is no requirement to give it undue consideration or weight.

31. These points should be borne in mind:

• a financially material consideration may be positive or negative, and there will be a question of degree
• at any point in time, markets and asset prices may not themselves reflect the full risk and return of an investment, especially over time
• in considering something that is presented as a “risk-adjusted return”, or a return based on an index, or return expressed as a net figure, it is important for trustees to be clear what financially material risk has been taken into consideration and whether there are other financially material risks that have not. Trustees are concerned with the question whether risk may affect other parts of the fund and over time, whereas some expressions of risk in the context of return are confined to the individual investment and its duration.
• some effects are indirect, but that does not mean that they are irrelevant or immaterial – it is recognised however that it will not be proportionate or practical to go into every detail of every indirect effect
• some matters are uncertain, but that does not mean they are irrelevant or immaterial – where a matter is of potential significance to risk, return, outcome or opportunity it would be very difficult to accept that pension fund trustees, advisers or managers might responsibly take the position that uncertainty about the matter, its causes and consequences, or its measurement, meant that it could be left entirely out of account

32. As mentioned, trustees are not required to take time on matters that are of minimal relevance. But they should be careful with the argument that is sometimes made that a matter is individually “too small to make a difference”. This does not always mean the matter does not need to be considered, including strategically. Its significance may increase over time, or its significance may depend on what others may do. The effects of an investment by the pension fund may be alone or in combination with other things, including other pension funds.

33. As noted, sometimes it is the wider effects of an investment that may be financially material. An investment decision may have an effect on return or risk elsewhere across the portfolio or investment fund.

34. Trustees are likely to have to work with multiple time horizons, including the shorter term and the long term. The time horizons with which they are concerned include the lifetime of the scheme and the lifetime of members. On the whole, the duties of pension fund trustees support them in taking a long-term outlook (but including consideration of stages along that term), and in taking a broad perspective. Operational time horizons should not obscure this.

35. The “financially material considerations” relating to an investment go well beyond the level of return that may be targeted or received from an investment in the short term. The true return or performance will include the income or gain and the consequences of that income or gain. The duties of trustees support them in taking account of longer-term risk alongside shorter-term return. The “best interests of members” can also embrace the idea of increased short-term cost, or reduced return in the short-term, for longer term benefit or future opportunity for the fund, or longer term risk to the fund.

36. In these circumstances, decision-making does include looking at where the world may be over time and at standards that may in due course be set. Material risks and potential outcomes over the period of the investment will of course be considered. But the risk that comes with an investment may outlast the investment. Activity that may attract obligations to remediate is one example. When taking investment decisions, trustees should also think about the long-term consequences of investments for members’ best interests deep into the future, for the period they consider necessary to fund pensions.

37. The consequences of an investment, or the effect of circumstances on an investment, may develop or become differently understood and evaluated over time. Change may not be linear. Material developments may sometimes be sudden, or without alignment to existing investment strategies. They may have retrospective effect or may reverse previous developments. Developments may occur without exit routes for the investment or the pension scheme.

38. If the law applicable to an activity relevant to the investment will likely not stand still, this may be financially material. The point is not confined to legislation and regulation, as these are not the only sources of law. It is also not confined to English law, as overseas laws may affect the position. As with other developments that may be material, change in the law may be retrospective. These matters are identified because they can be important where the longer term is considered. Including them in consideration need not be burdensome; a reasonable and proportionate approach may be taken.

39. This guidance next addresses 3 particular areas in connection with financially material considerations:

• economies and other systems
• sustainability
• future costs and circumstances of living for members

Economies and other systems

40. Pension funds exist as participants in much wider financial and economic networks. They depend upon economic system resilience. Financial considerations material to an investment and the pension fund as a whole may be revealed, or further or fully revealed, at the level of systems or whole economies.

41. From setting strategy, principles and policies for investment of the pension fund, through to stewardship of investments, it is proper for pension fund trustees to situate investments and the pension fund as a whole within the wider economy, regional, national and global. This includes where the investment itself may affect economic or market conditions that are financially material to the pension fund and the payment of pensions.

42. Some financially material risks and opportunities cannot be understood solely at asset level. A broader system-level or economy-level lens may be appropriate and proportionate to help trustees understand those financial risks, as well as opportunities, and so that the full dimensions of financial materiality are better understood in investment decision-making. This is all part of the duty to act in the best interests of the members in relation to a fund that has the purpose of paying pensions over time to its members. There will not always be numbers (rather than narrative) available for this consideration but (as addressed further below) that is not an obstacle.

43. Investment decisions can affect systems and economies as well as be affected by them. Sometimes an investment or type of investment itself adds risk to markets and economies. An issue may be “systemic”, in the sense that it can affect or spread across an entire network, system, market or economy relevant to an investment or the fund. Consideration of a matter does not imply that trustees can control or resolve the matter, or that they have responsibility for it. It does however go to their decision-making.

44. Examples of considerations at system-level or economy-level, within a timeframe relevant to the payment of pensions to members, are set out below. This is not intended to be used as a checklist for each occasion. Rather, these are examples one or more of which may be relevant in the particular context and deserve proportionate consideration in the interests of the fund and thus its members.

• risk to financial systems, for example from leverage, cross-default, interdependency, wholesale loss of liquidity, loss of financial or capital market resilience
• major developments elsewhere in business and society, including AI, resource constraints and supply chains
• responses of governments, businesses, consumers and the public, driving changes in:
  • behaviour and conduct
  • confidence and reputation
  • business standards and workforce practices
  • responsibility and governance.
• risk or opportunity in respect of biodiversity and nature, food security, population movement, climate, the environment and biodiversity, health and disease, education and inequality
• effect of war or conflict or breakdown of the rule of law or security

Sustainability

45. Sustainability is integral to decision-making by pension fund trustees. There can be different usages of the term, but it brings consideration of what can last and what cannot, balance in the use of resources, and the effects of economic activity. A focus on sustainability may reduce risk or improve return. The relevant entry point for consideration of sustainability in the context of pension funds is as a financially material consideration.

46. Taking sustainability into consideration may reveal new understandings of unrewarded or unmanaged risks or illuminate effect and true return. Sustainability may require particular attention for a number of reasons, including because of the potential severity of effect; because there are risks that cannot be addressed by diversification or active investment management; and because opportunity may be revealed.

47. “Environmental, social and governance” is a legal term under regulation 2 of the Occupational Pension Schemes (Investment) Regulations 2005). Regulation 2(4) provides that “financially material considerations” include (but are not limited to) “environmental, social and governance considerations (including but not limited to climate change), which the trustees of the trust scheme consider financially material”. Not all environmental, social or governance matters will be financially material, but they should be considered and they will come into investment decision-making where they are financially material, in the context of a fund whose purpose is to pay pensions over time to members. Some will require that consideration at system-level.

48. Environment (including climate change, nature loss and biodiversity decline), governance (of investees) and inequality are properly seen as among the important areas of sustainability, and there are others. They can be relevant to risk and return and have an effect that changes over time.  It is sometimes argued that matters like biodiversity and climate change are matters for governments, but that does not negate their relevance as a financially material consideration to trustees making an investment decision and to the pension fund.

Future costs and circumstances of living for members

49. The value of pensions to members depends not only on their nominal amount but also on what the pensions may be needed for and on the economic conditions in which they are received. In particular, what might be termed the real or effective financial value of pensions to members may be affected by the cost, availability and accessibility of goods and services on which members are likely to rely in retirement and over the wide range of time horizons involved.

50. In this light, it cannot be said that future costs and circumstances of living for members are incapable of being a financially material consideration in investment decision-making. This is not to make these future costs and circumstances the responsibility of trustees. But it is to recognise that these future costs and circumstances may be taken into account if and where trustees reasonably conclude that there is a credible connection between an investment decision and member retirement outcomes. Such connections may arise through effects on the value of pensions in retirement or on members’ ability to build pension savings during their working lives. The context remains the scheme’s purpose of providing pensions to members over time.

51. This is ultimately an area for trustee judgment. Different schemes may reasonably reach different conclusions on the relevance and practical significance of the issue. Although certainty is not required, trustees may properly decide not to take the issue further where they conclude that doing so would be disproportionate or impractical. An example is where, using their judgment, trustees conclude that further examination of the issue would add complexity with little prospect of a useful outcome, especially in the context of questions of scale or causation.

52. On the other hand, when trustees are looking, for example, at risk, return, opportunity, resilience or diversification, they may consider that an area of investment (alone or taken together with investment by others) is reasonably capable of having an effect on the future costs and circumstances of living for members (alone, or with others) and thus on the real or effective value of their pensions. Where they take that view, they may give the consideration a place in investment decision-making, alongside other financially material considerations and as part of an overall assessment of financially material considerations. Trustees may note too that mitigation or reduction of system risks, discussed elsewhere in this guidance, may already affect positively the future costs and circumstances of living for members.

53. Trustees are not expected to investigate or assess future costs and circumstances of living for members as part of each and every investment decision. Approaches and practical paths to dealing, in an appropriate case, with the future costs and circumstances of living for members as a financially material consideration may develop further in time. Trustees may find the issue one that it is valuable to discuss periodically with managers and advisers when considering long-term risks, opportunities and investment outcomes.

54. This guidance turns next to the separate topic of non-financial matters.

“Non-financial matters”

55. Some matters described as “non-financial matters” are in some circumstances capable of being relevant in investment decision-making.

56. This will be infrequent because, as will be apparent from the previous section, considerations will so often, on analysis, be financial and, where they are and are material, they should be taken into account by trustees for that reason.  For example, although existing regulation includes “the views of members” in relation to environmental impact as a non-financial matter, it includes as financially material considerations environmental considerations which the trustees consider financially material.

57. Where a matter is pressed on a basis other than its objective financial materiality, trustees should consider taking advice about the approach to be followed. The Law Commission has said: “In general, non-financial factors may be taken into account if two tests are met: (1) trustees should have good reason to think that scheme members would share the concern; and (2) the decision should not involve a risk of significant financial detriment to the fund”.

58. In this context, the Law Commission’s description of a “non-financial matter” focused on the motive underlying the consideration, recognising that factors which influence investment decisions may be motivated by non-financial concerns. Its treatment included the reminder that a non-financial matter will still need to be weighed with other considerations when an investment decision is to be taken. It has also said that “trustees cannot simply refuse to take account of non-financial matters in all circumstances, however serious the harm to scheme members”.

Taking investment decisions

59. A decision will involve weighing relevant matters and making a judgment on what serves the best interests of members (see the ‘best interests of members’ section). This will include weighing all financially material considerations. The weight to be given to a relevant matter is a matter of trustee judgment in the circumstances of the case.

60. The presence of their fiduciary duties requires reasonable care from pension fund trustees in investment decision-making; they are “conducting the affairs” of others. Research and analysis and evidence-based decision making will be involved. The decision-making exercise is demanding, but the law does not require a disproportionate or impractical exercise. The process and governance of decision-making is important, and some frameworks may need to be revisited over time.

61. Investment decisions are not taken with absolute certainty or with all possible information available. The law recognises that there may be a range of appropriate decisions, and that sometimes (for example) a decision for an investment may be just as appropriate as a decision against. Pension fund trustees are, broadly speaking, not judged in hindsight, and nor are advisers. Nor are pension trustees expected to have perfect foresight when making complex decisions about investment.

62. The fact that views differ on an investment does not make the decision subjective: the decision can still be objective where it is a matter of judgment on which different trustees may differ, but which is not based on personal preference. The exercise of care does not guarantee a particular outcome to which trustees will be held to account. Reasonable care does not require undue caution. In fact, too little or too much caution is not in line with responsibility “for the conduct of the affairs of another”.

63. Ultimately a decision has to be made, and the trustees are entrusted to make that decision and use their judgment to arrive at a decision. They bring their qualities to the decision-making required in the best interests of members. Trustees are entitled to feel confident in exercising what is their judgment, approaching their decisions in a proportionate and practical way. They are entitled to respect from members and the courts when they have done their reasonable best.

64. Whilst trustees may bring their own relevant experience and knowledge to decisions, most trustees will not have full expertise on all matters relevant to their responsibilities. Discussion with other trustees and advice (from duly appointed investment advisers, actuaries and legal advisers) and delegation (to authorised investment managers) can all play a crucial role in trustees fulfilling their duties. The trustees will often be obliged to take advice or will choose to do so even where not required to do so. Assisted by investment advisers, trustees may develop and then refine investment beliefs and investment principles to assist them, including in light of this guidance.

65. Trustees may require more or different information from or about investees and investments than in the past. The trustees are entitled to question and challenge advice, and this guidance may assist trustees in doing so. Their judgment will usually be informed and assisted by the advice they take and information they receive. However, the trustees have the fiduciary and other duties described, and advisers and managers are not trustees.

66. Financially material considerations will be reflected in investment decision-making in a number of different ways. For example:

• as regards investment strategy, principles and policies: in investment views, strategic asset allocation and risk management frameworks
• as regards mandates when engaging advisers and managers: in expectations for information, analysis and reporting, portfolio construction, and arrangements for consideration of relevant risks, returns and opportunities
• as regards monitoring and review: in considering whether, for example, investments align with strategy, expectations are being met and relevant considerations are appropriately reflected

67. Financially material considerations are also reflected in stewardship, in decision-making when considering pooled investing, transferring to a master trust or consolidation provider, or a “buy-in” and “buy-out” involving an insurer.

68. In the context of investment decision-making, it is appropriate for trustees to include the following in what they ask themselves:

• Have we identified all relevant matters that we can reasonably identify?
• Do we know enough to consider and weigh those matters? If not, how do we address that shortfall in our knowledge, within the bounds of what is reasonable and proportionate?
• Have we got the advice and information we need? Do we understand it, and if not, what do we reasonably need to do to understand it? Should it be challenged?
• Have we weighed all relevant matters?
• What is our decision and for what reasons? Does our consideration require any related action?
• If our decisions seem always to favour investments that offer the highest short-term return, are we sure that we are considering all financially material considerations?

Trustees may find it helpful to develop a practical framework for their decision-making. The content of this will depend on the size and circumstances of the scheme and the resources reasonably available to it, but a simple example of some elements is illustrated here:

• What could materially affect outcomes for members over the relevant time horizon?
• At what level does risk or opportunity arise - asset, portfolio, economy or system?
• Do we understand the position sufficiently to make a reasonable judgment? If not, what more would be reasonable and proportionate for us to do to gain that understanding?
• What proportionate action is available to us – e.g. strategy, allocation, mandate, stewardship, collaboration, policy engagement?
• What decision should we reach; what action should we take?
• What should we record and monitor?

69. The reasons for the decision should be capable of being explained and should be recorded succinctly. This should include identifying matters carrying financially material long-term implications. The discipline of recording and explaining decisions can itself help improve the quality of decisions. The practice of explaining decisions can reduce misunderstanding. Informed challenge to decisions or to provisional decisions can lead to improved decisions.

70. When matters are being weighed trustees may take a proportionate and practical approach. They can properly take steps to guard against focussing so much on one matter they fail to give due consideration to other relevant matters. However, the trustees will need to consider issues at all levels: asset, portfolio, economy or system. Some areas may carry a limited level of risk if expressed as a percentage but the nature of the risk in question is of very great significance. This is an area for particular care. The significance of the risk may lie in its global dimension. It will not always be possible to weigh matters by seeking to attach a price to them: see the treatment of numbers and narrative below.

71. It should be recognised that one decision may lead others to do the same. It is relevant to consider what could happen if others took the same view as the trustees are considering taking. This is because that may illuminate further whether the decision would serve the best interests of the members.

72. Sometimes there may be a sense of or reference to “trade-off” of one matter against another. This is still part of the process of taking account of all relevant matters and reaching a decision by weighing them. The weight and nature of each matter will come into the consideration.  Choosing an investment that targets a lower level of income or gain than others may not involve “giving up” return where the investment made reduces risk or contributes in other ways that are financially material, in the context of a fund whose purpose is to pay pensions over time to its members.

73. The remainder of this section of the guidance addresses the following things that trustees should expect to have to work with:

• differences
• “numbers and narrative”
• stress testing, scenario analysis and system-level consideration
• uncertainty

Differences

74. Trustees should expect difference between their deliberation (and need for information) and those of others. What investee companies or those leading an investment may be looking at and what trustees may be looking at may differ. In relation to time horizons one can see there is a potential for difference between what investment managers may be looking at and what trustees may be looking at, and this will require discussion. The trustees have to look at different time horizons, including up to as far ahead as the point when pensions cease to be paid. The managers are of course there to assist but they may in practice be looking at the life of the investments.

“Numbers and narrative”

75. Trustees can draw on a wide range of information (data) when making investment decisions. Analysis, projections, research, and insights (including insights from stewardship), may assist their consideration of the long term and the best interests of members. Trustees should expect that the information (data), and in turn the reasons for their decision, made with regard to financially material considerations, should involve both numbers and words. Analysis of quality through words is no less robust, including from a legal vantage point.

76. In some circumstances an investment with a return expressed as a number might be declined by the pension fund trustees because of a risk expressed in words. Sometimes financial considerations cannot be quantified but it does not follow that they lack weight. The further the time horizon the more that a number (which in that context is at best a projection) may be speculative, and the more that a narrative may be important. It may be difficult for associated risks and returns, possibilities and probabilities to be fully understood if expressed simply as a number.

77. These points are highly relevant to advisers and investment managers and investment consultants in their work to support pension fund trustees. Rigorous qualitative and not simply quantitative consideration is now more important in the pension sector, to assist the effort to achieve decisions in relation to a pension fund that are based on a balanced and informed judgment, in context and with attention to relevant time horizons.

78. Forms of assistance, with both numbers and narrative, are increasing, including through developments in disclosure requirements and expectations both from companies and in markets. Forms of assistance are also present more generally through national and international regulatory and best practice frameworks and development of reliable forms of analysis. Systems-thinking capability, seen not simply as a form of analysis but also as a whole approach, may also be increasingly available to trustees and advisers.

Stress-testing, scenario analysis, system-level consideration

79. To help understand financially material risks and opportunities trustees may use stress-testing and high-quality scenario analysis and system-level consideration where this is available and proportionate (a number of regulators have undertaken work on scenario-analysis, and regulatory alignment may support proportionality). This work may be qualitative in nature. It may lead to change in the policies and strategy of a pension fund, in asset allocation and portfolio selection, in manager selection, and in governance and stewardship frameworks.

80. At system-level, consideration includes both system-level effects upon investments and the potential effects of investments at system-level. Consideration also includes the extent to which the management of investments can influence some forms of system-level risks including over the long term. This may include allocating capital to investments that contribute to solutions, engaging actively with investees, collaborating with other investors, or working with policymakers where appropriate. Such activities can form part of prudent stewardship, considered further below, aimed at protecting and enhancing long-term financial outcomes for members. Trustees will recognise that, acting individually, the ability of a fund to influence some forms of system-level risk will be limited. Collective action with other pension schemes and investors may be a more effective and proportionate approach.

Uncertainty

81. When faced with uncertainty, trustees would be correct to include the following in what they ask themselves, in the context of investment decision-making:

• Do we understand the nature and implications of the uncertainty?
• Are there further questions or is there further advice or information that may assist us?
• In our decision-making process are we considering all relevant matters including the matter on which there is uncertainty?
• What is the overall balanced and sensible judgment we can reach?
• Might the uncertainty be resolved in time and what steps will be taken to monitor and review decisions taken now?

Stewardship of investments

82. The duties of trustees in relation to investment extend to stewardship. Stewardship involves using both commercial and legal rights and benefits acquired by the investment or arising from investing. It is a means to achieve the responsible allocation, management, and oversight of capital to manage risk and create long-term sustainable value for members, rather than a separate investment objective, but it is consistent with the fiduciary duties of trustees. Stewardship recognises that investing is a continuing process and pension funds are part of the financial ecosystem.

83. Stewardship includes all aspects of financially material considerations. It should be pursued in a manner consistent with the trustees’ duties and the interests of the fund and its members.

84. In practice stewardship (which will need to be appropriate, balanced and proportionate, and cost-effective) is likely to be carried out on pension fund trustees’ behalf by investment managers, or perhaps other stewardship service providers (including dedicated in-house teams). That said, trustees can have an active role in determining or informing and shaping stewardship approaches and strategy (even if investing in index-tracking funds) and there are examples of in-house stewardship by pension funds themselves. Again, for practical reasons, and to increase effectiveness, stewardship may at times be an area for steps to be taken collectively by and in the interests of the pension fund among other investors. This too may be through managers and others.

85. But trustees should expect to engage with the investment managers and to question and challenge. Pension fund trustees will wish to have processes for the proper communication of their desired approach to stewardship, and for proper oversight of the investment managers’ work on stewardship to reassure themselves of its effectiveness. Trustees should take stewardship performance of managers into account before appointment and in monitoring and at review, both in terms of activity and outcomes.

86. Different forms of investment will give different options for stewardship, or engagement. Stewardship is not confined to equity investments, although there is room for development of how stewardship is practised effectively for some other asset classes. Strategy, structure, governance, culture and purpose and standards of an investee (corporate or other) or of those leading an investment (which may include sovereign and collective investment schemes) may all be relevant to risk and return, now and in the future. Cost-effective and proportionate steps to encourage responsible behaviour and high standards by investees or potential investees generally may be proper and important steps for pension fund trustees to take or encourage, including through the work of investment managers and other investment professionals.

87. Where the investment is, directly or indirectly, in or through businesses formed as companies, the companies will owe duties to others. The directors of those companies, and of the groups of which they form part, will themselves owe fiduciary duties or similar. The performance of those duties by those companies and directors may be financially material for the pension fund as well as for the companies themselves. For example, whether and how the companies themselves have regard to time horizons, to sustainability and to system-level considerations will likely be material to the pension scheme.

88. Public policy engagement may be considered as a stewardship tool where trustees reasonably conclude that the subject matter is financially material to the scheme and its members, and the engagement is appropriate, proportionate and cost-effective. Public policy engagement involves making representations to the government and other relevant bodies on matters including legislation and regulation. These can have a material effect on the financial performance of assets within a fund, particularly those held over the long-term or which are illiquid. Trustees may engage on topics which affect the interests of members, including the position of investees and factors that influence resilience. The engagement may be direct or indirect, including through associations or industry groups and collaboration.

89. Where trustees ask investment managers to undertake public policy engagement on behalf of trustees, trustees should have regard to the manager’s duties and responsibilities to its clients as a whole. There will need to be due consideration and respect for the interests of other clients of the investment manager. There may be some areas where the investment manager is not in a position or best placed to undertake public policy engagement. In these situations, trustees may wish to assess the position including whether other means of undertaking any appropriate public policy engagement are available.

90. In relation to stewardship trustees would be correct to include in the questions they ask themselves, or they ask of those who have agreed to undertake the stewardship, the following. Managers, stewardship service providers and others may ask themselves the same:

• What stewardship is being undertaken, and by whom?
• How does the stewardship address financially material risks and opportunities?
• How do we assess whether the stewardship is effective? Are there ways of overcoming practical barriers here?
• What more might cost-effectively and proportionately be done, and by whom, and would that be appropriate?
• Where a financially material consideration has been identified, would proportionate engagement with policymakers, regulators, industry bodies or others assist the scheme’s investment objectives or stewardship activities, and if so how and by whom?

Pooled investments, master trusts, “buy-in” and “buy-out”

Pooled investments

91. When reaching a decision on investment in a pooled fund, trustees will take into account the fact that their trustees’ fiduciary duties continue, but that others involved with the pooled fund will have their duties too. Trustees will need to understand what the pooled fund will do (and not just the level of income or gain that may be targeted or received in the short term) and then ask themselves whether that aligns with what is needed and what needs to be added alongside.

Transfer to a master trust or consolidation, “buy-in” and “buy-out”

92. If trustees are deciding whether to transfer to a master trust or consolidation vehicle or to agree to a transaction that will see a “buy-in” and “buy-out” involving an insurer, the financially material considerations discussed in this guidance remain relevant. When selecting the master trust provider or the consolidator or the insurer, trustees should consider the future administration and the security of pensions that the provider or insurer will provide.

93. The approach to investment long-term by the provider, consolidator or insurer is part of this, just as it is for trustees. When contemplating a transaction of this nature and selecting and engaging with a transaction partner, it is appropriate for trustees to look at the transaction partner’s own approach to investment long-term and how this aligns with the trustees’ own assessment of financially material considerations. The best interests of members may continue to require consideration beyond the single dimension of the level of income or gain that may be targeted or received, and the time horizons concerned continue to include the lifetime of members. Financially material considerations over that period should therefore continue to be considered as part of any such transaction.

Advisers, managers and other professionals

94. The trustees’ task is a significant one. Understanding of what is involved in the task has developed over time, and will continue to develop. The selection and contribution and support of others (investment consultants, investment managers, actuaries, lawyers, other advisers, and whether in-house or external, and including fiduciary managers or Outsourced Chief Investment Officers) is important.

95. It is well understood that pension fund trustees are required to take reasonable care in the selection of an adviser or manager, in setting the terms of their mandate and in monitoring their work. With increased understanding of what is involved in the trustees’ task, it is possible that trustees may need more from some of these professionals, including in the form of information. In turn, professionals should expect that more may be needed from them.

Advisers

96. Even if advisers have properly taken a relevant matter into account for their advice, it is still for the trustees themselves to take that relevant matter (and the advice) into account for their decision. There may be other relevant matters which the advisers have not taken into account; it is for the trustees to make sure those relevant matters are taken into account. Trustees will need a proper understanding of the context of advice.

Managers

97. Generally speaking, managers are appointed to provide their services within a commercially agreed mandate and guidelines. This is the opportunity to set expectations and give clarity that will then allow managers to do their job. The managers bring expertise. Trustees are not expected to second-guess day-to-day investment decisions made by managers, often under delegated authority. However, trustees will need to understand the way in which decisions will be made and investments will be managed. They should be prepared to ask reasonable questions and seek reasonable information so as to achieve this understanding.

98. Some pension schemes will engage more closely with investment managers than others. Larger schemes may have a detailed framework of engagement, including (for example) theme setting, review of risk and opportunity, a more detailed mandate, and guidelines including on stewardship, all supported by regular meetings.

99. For other schemes, the mandate and guidelines may be taken from drafts formulated by investment managers. There is no objection in principle to this if the drafts are considered appropriate by the trustees, having regard to their fiduciary duties as explained in this guidance. Even smaller pension schemes may press for greater choice of investment options than they have experienced to date.

100. The available terms of the mandate and guidelines will need to serve the overall strategy, principles and policies that the pension fund trustees will have decided after taking advice and after any required or appropriate consultation. At the same time, it is only realistic to recognise that the available terms will also inform what strategy, principles and policies are achievable for the scheme.  Where alignment is imperfect, or (as a separate point) where managers have “house exclusions” with which trustees do not agree, trustees may still retain the managers, provided they consider the implications.

101. It is generally not realistic to expect a mandate to be adjusted often. Where trustees have delegated to a manager a discretion to make decisions about investments, trustees should ensure that the guidelines for the manager are in line with applicable regulations and take reasonable steps to satisfy themselves that the manager is exercising the discretion in accordance with those regulations.

102. Both trustees and managers will need to keep in mind that an investment or investment pool that combines investors will mean that managers will have a range of duties to a range of participants. Further, the incentivisation of investment management firms (and within those firms) should not be out of alignment with the mandate agreed with trustees.

103. Trustees will receive reports from managers to allow trustees to monitor performance. The performance of managers goes beyond the level of return that may be targeted or received from investments in the short term. Many other matters discussed in this guidance are relevant. More generally, incentivisation and performance monitoring and stewardship will need to reflect the importance of time horizons and to support and facilitate long-term decision making.

Relationship between trustees and investment professionals

104. It is in the interests of the pension fund and the members that there is a successful relationship between trustees and advisers, managers and other investment professionals (including where in-house). This requires mutual understanding and appropriate transparency. It requires trustees and the professionals to assist each other to find the best ways of support being given. There should be appropriate governance and monitoring of delegated investment decisions for balance and judgment.

105. It is always important that advisers and managers make clear, and pension fund trustees understand, what advice is based on; what advice covers and what it does not; what managers are doing, and how; and what managers are not doing and what the consequences of that are.

106. Because trustees will not generally be involved in directing specific day-to-day investment decisions, they can focus on the wider picture and the time horizons, and questions such as resilience. This may help pension fund trustees consider further what they require from advisers and managers, in order to do their job as trustees.

107. Pension fund trustees are entitled to challenge professionals to help the trustees to perform their duties. Advisers and managers should expect this and support trustees to understand. Understanding of investments and markets is continually developing and it is proper for pension fund trustees to seek out contemporary thinking, looking to their advisers and managers for this. This may include the systems-thinking capability of or accessed by advisers and managers including how approaches to system-level risk and opportunity are resourced and evidenced.

108. Open dialogue within and between pension fund trustees and advisers and managers is essential for ensuring balanced advice and decision-making that does not miss critical context. In order to identify and consider relevant matters properly, it is important for pension fund trustees to ensure that they and the advisers and the managers do not work in “silos”. Where investment managers have separate teams devoted to relationship, governance, sustainability, and investment then it will be important to trustees that the support carries through that chain. Alignment in engagement with investee companies or of those leading an investment is similarly important.

The views of members

109. Investment decisions by trustees are made in the best interests of members. The scheme and the members count on the pension fund trustees, rather than the members, to give due consideration to relevant matters in investment decision-making.

110. Trustees may explain to members current policies and approaches and the rationale underpinning them. Generally, trustees are not required to seek member views on investment strategy or other aspects of investment decision-making. They are however entitled to do so. Where they do seek member views that does not mean they must follow those views or give them weight.

111. Views of members may sometimes be helpful, perhaps as a source of ideas or suggestions that could be considered on merit. Taking members’ views may support trustees in considering whether they have good reason to think that members would support a concern (see above in the context of “non-financial matters”, although the subject of members’ views is not confined to “non-financial matters”). But without seeking member views, trustees may still reflect on what members as a body would want the trustees to think about before a decision is made or about a decision made. As indicated in the ‘best interests of members’ section, trustees could be expected to have a reasonable understanding of the composition of the membership. There are situations where, without asking members, trustees may be confident that members would share a particular concern about one thing or a positive view about another. Consistently, the Law Commission wrote of trustees having “good reason to think that scheme members would share” a concern, and not that trustees are required to seek members’ views.

112. Going on actively to seek views of members on investment is a decision to be made only after careful consideration. There may be practical challenges and cost. The exercise will still leave the pension fund trustees with the decision to make, and with the responsibility for it. To approach this effectively, it is important to keep in mind:

• no member has the duties towards members as a whole that a trustee does
• no member puts an investment decision in the hands of another (non-trustee) member
• members’ views will not be based on all the information available to the trustees
• an individual member may offer a view that is not based on the best interests of members as a whole
• a view may not be representative
• experience shows that participation in consultation can be low

113. Much may depend on the type (such as defined benefit or defined contribution) and circumstances of the scheme. Where members’ views are sought this may take different forms, from a questionnaire to a scheme member survey, to a meeting, to a structured process of deliberation especially for a large scheme. Assessing responses may need to include an assessment of weight. There may be a reasonable expectation that trustees tell members what the response was and how the trustees used any information gained, but that is not however a requirement.

114. In an occupational pension scheme, regulation requires trustees to consult the employer on investment strategy in defined circumstances and specifically before preparing or revising a statement of investment principles.

Working together

115. Pension schemes can sensibly work together, for example to increase understanding, promote best practice, develop strategy, improve effectiveness, share cost and address challenges including those that can only be addressed by a shared lens or combined approach. Trustees will consider whether proposed collaborative work serves the purposes of the pension fund and is proportionate and relevant in the circumstances of the particular scheme. Of course, behaviour that is anti-competitive has no place here.

116. Some system-level issues, financially material to the scheme, in particular may benefit from collaborative engagement, including in the form of research, strategy or stewardship, and between investors, regulators, governments, industry bodies, not-for-profit organisations and other stakeholders. Other examples of collaborative engagement may be with investee companies, index providers and credit rating agencies.

117. The scale and significance of some subjects - AI and climate amongst them - is such that an improved understanding of their relevant implications and what is needed to address those implications may only be possible if a collaborative approach is included.

Annex

Practical examples

Example 1

Trustees find the support offered by investment managers comprises only quarterly results and risk monitoring with a narrow compass. The trustees conclude that, although this support has a low cost, it is not sufficient to enable them to fulfil their fiduciary and related duties in respect of investment. They consider how to address the gap between that support and what they need.

Example 2

A proposed investment strategy is expected to have positive and negative consequences that are financially material. The trustees identify those consequences, including at system-level. They have reasonable and proportionate regard to what others may do and any cumulative effect (because that may illuminate further whether the decision would serve the best interests of members). They assess, using narrative and numbers, how material each consequence is over the time horizons that are relevant to the funding of pensions over time to members. In doing so they take into account the potential for change in those consequences. The trustees reach a balanced conclusion and express their reasons concisely. They are aware that others might have reached other conclusions, but their conclusion is the one that represents their best judgment. They will monitor the position carefully and they agree how this will be done.

Example 3

An area of proposed investment is in an activity that is said to cause harm. The trustees take into consideration the fact that this may carry (among other things) a real risk of dispute or litigation or arbitration over the activity and that the risk may either be at the time or in time. This includes litigation (etc) risk against investors and not just against investees. The trustees note that the risk is not just a question of the degree of possibility of adverse outcome, but also the cost, the time and the element of uncertainty in litigation and arbitration.

Example 4

At a meeting and when reviewing investment, trustees properly recognise that climate change or nature is capable of being a financially material consideration. They give proportionate consideration to the question whether it is financially material in the circumstances of the fund, at investment, portfolio and system-level, and include consideration of what others may do and to time horizons. The answer to the question may be “No” or “Yes” but for either answer a reason or reasons would be required. If the answer is “Yes” the reason or reasons will further assist the trustees when weighing financially material considerations for investment decisions ahead.

Example 5

The trustees discuss 2 areas of investment. With the first, and looking at risk, the trustees go on to identify the possibility that the risk would build if others made the same type of investment, and without anyone taking steps to manage the risk, if indeed it was a risk that could be managed. With the second area of investment, and looking at opportunity, the trustees note that the area of investment is likely to bring a reasonable return individually, but they then go on to identify the possibility that, when taken with investments that the investment by them might cause others to make, the investment would also have a positive effect on an economy in which the pension fund was already invested, to the further benefit of the fund.

Example 6

A choice between two pooled investment funds is available. One of the funds proposes to include investment in activity that has the potential to cause pollution that is harmful to third parties. For that reason, the activity is regulated in some parts of the world. The fund proposes however to invest in a part of the world that does not regulate the activity. The trustees look to see whether even without current regulation the activity is proposed to be carried out to the higher standards required by regulation in other parts of the world, recognising that this may reduce the financial risk from the potential to cause harm. The trustees also recognise that the financial return from the investment may change over time because regulation may come in at a later point.

Example 7

The trustees consider the implications of investment in or related to AI over the time horizons that are relevant to the funding of pensions over time to members. They recognise that this consideration needs to include the consequences of AI in the wider economy and at system-level. They take into account the presence of uncertainty and the potential for change in the consequences. They also decide to monitor the position and agree how this will be done practically and proportionately. 

Example 8

The trustees are considering proposed future investment of the fund in an area of energy infrastructure. They are assisted by advisers and discussion with investment managers. They examine risk and return of the investment proposed in that area, including over the long-term. In so doing, one point they note is that a positive contribution of the proposed investment towards long-term employment, energy resilience and cost of supply, should (in the particular circumstances of their scheme) benefit both economies in which the fund is already invested, and also economies in which the members of the scheme will likely retire. In connection with the latter, the trustees note also the particular relevance of a positive contribution towards energy resilience and cost of supply to the real or effective value of the pensions that members will receive. The trustees recognise that the question of remoteness can be debated and take the view that it is not proportionate to attempt calculations. They recognise that the proposed investment supports the contribution only if taken with like investment made by many others. However, they conclude that the contribution nonetheless has a place as part of the financially material considerations relevant to the proposed investment. The trustees weigh the financially material considerations of the proposed investment and of alternatives before reaching their investment decision.