NEST sees no conflict between a master trust’s fiduciary responsibilities to its members and investment in the companies and infrastructure of the UK
In May, Roger Urwin, co-founder of the Thinking Ahead Institute, shared his thoughts with IPE readers on the confusion around the term fiduciary duty for pension schemes, particularly noting the complexity of acting in the ‘best financial interests’ of savers.
It often seems as though occupational pension schemes and their advisors hide behind the complexity of managing long-term financial risk to members as a reason not to engage with or explore new opportunities.
Fiduciary duty shouldn’t limit trustees but rather empower them. Trustees have a duty of loyalty to their beneficiaries and a duty to act for the proper purpose of the trust. That provides a broad framework for various investment approaches and instruments, and a wide scope in interpreting how to articulate beneficiary interest and financial factors.
A cautionary mentality and a narrow interpretation of fiduciary responsibility are counter-productive, often leading to a lack of innovation and herd-like behaviour. This is exactly what the new consultations around consolidation and exposure to UK productive assets seek to challenge.
Financial factors can – and often should – include broader economic considerations, such as climate change, improvements to UK infrastructure, and support for successful British companies that employ and provide services to UK workers.
As NEST outlines in its investment beliefs: We believe we can deliver on our investment objectives and have a net positive impact on externalities that affect members’ investments and retirement outcomes.
We see no conflict between a master trust’s fiduciary responsibilities to its members and investment in the companies and infrastructure of the UK. These investments should not only generate long-term returns for members but also help improve their financial well-being throughout their lives, by creating jobs, raising wages, and enhancing UK infrastructure.
This does not mean schemes need to invest in private markets and UK productive finance if they don’t find compelling investment cases to do so or don’t have the scale and expertise to access such opportunities. However, the emphasis should be on identifying the barriers to such investments rather than claiming fiduciary duty prevents the seeking out of opportunities altogether.
We believe there is significant alignment with the investment horizon of many UK defined contribution (DC) schemes and the characteristics of unlisted assets. They’re natural bedfellows in that pension schemes like NEST can look to invest for the long term and be patient with the capital.
When deals are chosen carefully and liquidity risks suitably managed, private assets can provide a more reliable source of income, at often less volatility, compared to their public market equivalents. NEST already has 15% of its portfolio invested in private markets.
We believe investing in unlisted assets and productive finance are entirely compatible with our fiduciary duty. In fact, failing to take up opportunities could mean trustees are also failing in their duties.
With the expected consolidation of the pensions industry, previous barriers to entry for schemes should start to disappear, leaving fewer, larger schemes with stronger negotiating positions to set up partnerships with fund managers and increase private exposure.
More schemes should also be able to insource elements of fund management to drive down costs further, as we’ve seen in large workplace schemes around the world.
Australian superfunds, which are trust based, have significant assets in Australian infrastructure, social housing, and private equity. The idea that these investments are counter in their duty to their members would be seen as anathema.
Similarly, Canadian funds play a large and increasing role in many aspects of the Canadian economy, recognising that delivering world-leading investment returns can go hand-in-hand with improving Canadian workers’ quality of life.
In response to the Mansion House Compact, many signatory firms have set up funds ready for schemes to invest in unlisted equity. Signatories of the Compact currently hold nearly £800m in unlisted equity assets within their DC default funds, and this figure will only grow in the coming years.
With greater investment in private assets, the question becomes: “And why not in the UK?” Our research shows that excellent UK investment opportunities exist across asset classes, including property, infrastructure and supporting the transition to a low carbon economy. We’ve also invested more than £130m in unlisted UK companies, which are seeking to scale up their operations, through our private equity mandates.
NEST has a unique responsibility, in that we represent a third of the UK workforce, but all UK master trusts must recognise that a growing UK economy benefits both their members and their pensions, particularly when discussing anything around fiduciary duty.
Paul Todd is the chief operating officer of Nest Invest
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