Pension Fund Trustees Research Articles

Modern Challenges to the Prudence Expected of Pension Fund Trustees

Modern Challenges to the Prudence Expected of Pension Fund Trustees

Sustainable Income at Retirement and UK Pension Fund Investment Oversight: a Practice Perspective

Using practice theorizing, this paper sheds more fresh light into pension fund investment oversight and how trustees make strategic investment decisions in the complex institutional context. Using the insights from 22 in-depth interviews of pension fund trustees and pensions experts, we reveal that pension fund governance has been ‘ritualised’ in embedded and self-perpetuating practices. Specifically, the process of pension fund investment is dominated by a variety of contextual and internal constraints that often lead to a loss of value within pension fund investments, which is not in the long-term best interests of pension fund savers. Theoretically, our study raises important questions about the appearance rather than substance of governance and the principal role of pension fund trustees as non-executives in this process. We highlight the conflicting intersections around trustees as socially legitimate, trustworthy, independent social actors, as well as the challenges of working across social processes and structures in the effort to achieve fairer and more sustainable financial institutions. This has significant implications for policy and practice.

Exploring Temporality and Time Narratives: A case of UK Pension Funds’ Investment Strategies

This inductive study of UK pension funds examines how pension fund trustees and their investment experts organize time and attend to the intertemporal tensions between the short- and long-term within investment strategies that are inherent to business and investment sustainability. Grounding our insights in theorization about time through narratives, we use insights from 22 in-depth, semi-structured interviews with pension fund trustees and their investment experts to highlight the significance of embedded legacy and path dependency by revealing how temporal frames of the past become embedded in the present and perpetuated into the future. We also find an intertemporal tension where pension fund trustees separate and favour short-term funding pressures at the expense of the long-term intergenerational equity. We argue that omission of the past and legacy from most strategic management continues to contribute to short-termism, which is the blight of sustainability. We conclude by drawing out some implications for policy and practice, as well as directions for further research.

Behavioral biases in pension fund trustees’ decision making

PurposeBehavioral finance research has almost exclusively investigated the decision making of lay individuals, mostly ignoring more sophisticated institutional investors. The purpose of this paper is to better understand the relatively unexplored field of investment decisions made by pension fund trustees, an important subset of institutional investors, and identify future avenues of further exploration.Design/methodology/approachThis paper starts by setting out the landscape in which pension fund trustees operate and make their decisions, followed by a literature review of the extant behavioral finance research applicable to similar situations.FindingsDespite receiving training and accumulating experience in financial markets, these are limited and sparse; therefore, pension fund trustees are unlikely to be immune from behavioral biases. Trustees make decisions in groups, are heavily reliant on advice and make decisions on behalf of others. Research in those areas has uncovered many inefficiencies. It is still unknown how this specific context can affect the psychological effects on their decisions.Research limitations/implicationsGiven how much influence trustees’ decisions have on asset allocation and by extension in financial markets, this is a surprising state of affairs. Research in behavioral finance has had a marked influence on policy in the past and so we anticipate that exploring the decisions made within pension funds may have wide ramifications for the industry.Originality/valueAs far as the authors are aware, no behavioral research has empirically tested pension fund trustees’ decisions to investigate how the combination of group decisions, advice and surrogacy influence their decisions and, ultimately, the sustainability of our pensions.

Fiduciary Obligations in Business and Investment: Implications of Climate Change

Fiduciary obligation, under both corporate law and the common law, requires directors and officers to identify and address climate-related financial and other risks. In fulfilling their obligations to act in the best interests of the company, directors and officers must directly engage with developments in knowledge regarding physical and transition risks related to climate change and how these risks may impact their corporation. Depending on the firm’s economic activities, the risk may be minor or highly significant, but directors and officers have an obligation to make the inquiries, to devise strategies to address risks, and to have an ongoing monitoring to ensure the strategies continue to be responsive to the risk. Directors’ fiduciary duty requires that they have overseen and monitored the actions of the individuals charged with mitigation and adaptation; and have mechanisms in place to respond rapidly to changes in the company’s risk profile. In addition to fiduciary obligations, this study examines the statutory duty of care under corporate law, which requires directors and officers to exercise the care, diligence and skills that a reasonably prudent person would exercise in the circumstances. This duty requires directors and officers to supervise and manage the transition that will address the specific risks, as well as the new opportunities, posed by climate change. The study also examines pension plan trustees and other investment fiduciaries in respect of their fiduciary obligations related to climate change. Pension fund trustees have a fiduciary obligation to pension beneficiaries to act prudently in their best interests in making investment decisions regarding fund portfolios. In fulfilling their obligations to beneficiaries, pension trustees and their investment managers have an obligation to identify and address climate-related financial risk. Trustees can take climate change into account as a legitimate investment issue over the short or long term or both. If trustees fail to act to address material climate change risk, they may be personally liable for breach of their fiduciary obligation. Inaction is no longer acceptable, given all the evidence that climate change risk is material across the entire economy. Trustees can also take climate change into account because they have duties as public fiduciaries additional to their financial duty to beneficiaries. Fiduciaries have a duty to act even where the potential costs and benefits of climate change cannot be fully quantified immediately. Fiduciary obligation also requires considering the benefits of investment in green adaption and mitigation technologies and other products and services that are likely to have upside financial potential for return on investment.

Fiduciary Duty under the Microscope: Stewardship and the Spectrum of Pension Fund Engagement

AbstractUK pension fund trustees’ interpretations of their fiduciary duties may shape pension fund approaches to corporate stewardship and engagement envisioned by the UK Stewardship Code. Data from interviews with pension fund trustees, executives, investment intermediaries and pensions experts reveals interpretive pluralism of the concept of fiduciary duty in the area of pension funds. This article develops a model identifying the spectrum of pension fund engagement, linking interpretations of fiduciary duty to intensity and methods of engagement in practice. The findings help disambiguate the concept of ‘Fiduciary Duty’, highlighting the practical challenges of Stewardship Code application. These insights are relevant to the ongoing revisions of the Stewardship Code and policy clarifications of the nature of fiduciary duty by the UK Financial Conduct Authority. The paper encourages trustees, regulators and others to consider what role pension fund trustees should have in stewardship, which may not be directly relevant to their fiduciary duties as trustees.

Custody of Investments: Why Investors Should Pay Attention to the Back Office

Infrastructure related cost is a longstanding problem troubling the securities market. In addition to the service charges paid by investors, the risk associated with the investment chain can reduce the value of assets. Recent cases have shown reductions in value of more than 30%. Pension fund trustees and other investors with bargaining power should pay attention to the small print used in custody contracts.

Establishing the Legal Obligations of Pension Fund Trustees to Divest from Climate-Unfriendly Portfolios

Pension funds invest in all sorts of profitable activities, including fossil fuels, but the failure of pension fund trustees to consider and manage risks that climate change poses to their investment portfolios could be in breach of their ‘fiduciary duties’ under Trust Law in common law jurisdictions. A 2014 Law Commission report, ‘Fiduciary Duties and Investment Intermediaries’, concluded that many pension fund trustees had misconceptions about their fiduciary duties and the extent to which the law allowed them to factor environmental, social and governance issues into their investment decisions. This paper will examine, with case law, relevant legal principles from trust deed, the common law duties and statutory provisions, which can be used to initiate lawsuits against trustees investing in climate-unfriendly businesses. With a pension law reform recently introduced by Whitehall, it will also provide a new perspective on the climate change litigation risk facing English pension fund trustees in an evolving legal environment.

Vocabularies of Motive and Temporal Perspectives: Examples of Pension Fund Engagement and Disengagement

Prior research on institutional investors’ role in corporate governance draws a distinction between engaged and disengaged pension funds. The aim of this study was to shed more light on how pension fund practitioners talk about engagement and disengagement. Using insights from 35 in-depth, semi-structured interviews and round-table discussions with pension fund trustees, executives, investment officers and financial intermediaries, we identify different types of vocabularies and temporal perspectives used to account for different stances towards engagement. We highlight a tension between a seemingly causal relationship between accounts and future behaviour and argue that these ‘accounts’, ‘vocabularies’ and ‘uses of the past’ in themselves need to be treated as an object of study because they may represent not simply the individual motivations but rather the expressions of extant norms in the broader social context of financial markets. An important policy implication is that perceived realities of investment are unlikely to cause a change in pension fund behaviour because participants seem to decouple their view of the world from their impact on the world.

Climate change and the fiduciary duties of pension fund trustees – lessons from the Australian law

ABSTRACTLeading financial market participants increasingly recognise that issues associated with climate change present significant – if not unparalleled – financial risks. Regulatory, technological and social responses present particular issues for investment strategy, asset valuation, risk assessment and disclosure by institutional investors. However, governance literature has historically characterised climate change as a non-financial issue, at least over mainstream investment horizons. Accordingly, there has been little academic analysis of whether trustee directors are compelled, rather than permitted, to have regard to climate change risks. This paper seeks to advance the literature by examining the obligations of pension (or ‘superannuation’) fund trustee directors in Australia. The analysis focuses on the obligation to apply due care, skill and diligence under section 52A of the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act). It concludes that a passive or inactive governance of climate change portfolio risks is unlikely to satisfy their duties: whether the inactivity emanates from climate change denial, honest ignorance or unreflective assumption, strategic paralysis due to impact uncertainty, or a default to a base set by regulators or investor peers. Considered decisions to prevail with ‘investment as usual’ may also fail to satisfy the duty if they are based on outdated methodologies and assumptions.

The ‘best interests’ principle and seeking the Court’s blessing:Merchant Navy Ratings Pension Fund Trustees Ltd v Stena Line Ltd [2015] EWHC 448 (Ch)

This case, arising in a pensions context, has wider repercussions for general trust law development and practice which are explored in this article.

Divestment laws, fiduciary duty, and pension fund management: an empirical examination

Purpose – This paper aims to conduct an empirical analysis of subnational laws of the USA that require public pension funds to divest from companies that are in business with Cuba, Iran, Syria, and Sudan and explores whether public fund officials may be in violation of their fiduciary duty responsibilities toward pension system beneficiaries as they execute state-mandated divestment schemes. Design/methodology/approach – A database search was conducted for specific federal laws, presidential executive orders, and departments, offices, and terminology relevant to the topic of the research to explore the extent by which states employ public pension divestment regimes inspired by the federal governments designation of the four countries labeled as state sponsors of terrorism. Quantitative and financial calculations were used to conduct the cost analysis of divestment laws. Findings – Divestment laws are costly for the beneficiaries. In the majority of the states that have divestment laws, the public funds, rather than the states, must cover the losses associated with divestment, resulting in pension fund trustees and managers having to take action that are in violation of their fiduciary duty responsibilities. Research limitations/implications – The study recommends a major overhaul of the current divestment laws. Practical implications – Divestment legislations must be revised as they cause a divergence of interests between state-driven political gestures, the fiduciary responsibilities of pension system trustees, and the financial interests of the beneficiaries. Originality/value – This is the first study that recommends specific legislative action that would resolve the divergence of interests between state-driven political gestures, the fiduciary responsibilities of pension system trustees, and the financial interests of the beneficiaries.

Trustees and pension schemes in Ireland

Purpose – This article aims to highlight the gap between the legal responsibilities and the practice of pension fund trustees in Ireland. Design/methodology/approach – The paper relies on primary and secondary data analysis of trustee practice and enforcement cases to highlight the gap between law and practice. Findings – The article finds that there is an inconsistency between legal requirement and practice in the calibre of trustee and trustee training across Irish occupational pension schemes. This has adverse consequences for pension governance and performance. Practical implications – The findings raise the question as to whether there should be mandatory qualifications for trustees or mandatory standardised trustee training in a prescribed format, with which trustees should comply. It also questions whether there should be a governance code for trustees to ensure a minimum standard or target level of competence and good governance on the part of pension scheme trustees. Originality/value – There is a distinct lack of emphasis in the literature and in practice on the inconsistency between the extent of the responsibilities which trustees ultimately carry, and the legal exposure this potentially creates for trustees who unduly rely on other trustees or third parties in the trustee decision making process.

Engaged versus Disengaged Ownership: The Case of Pension Funds in the UK

AbstractManuscript TypeEmpiricalResearch Question/IssueThis study examines how the practice of pension fund investment management informs the ownership behavior of pension funds vis‐à‐vis investee corporations.Research Findings/InsightsUsing data from: 35 in‐depth semi‐structured interviews with pension fund trustees, executives, investment officers and financial intermediaries; documentary analysis; and observations of four fund investment meetings, we find a variation in pension fund behavior, where a very small number of well‐resourced and internally managed pension funds exhibit engaged ownership behavior. By contrast, the vast majority of pension funds operate at a considerable distance from their investee corporations having delegated pension fund investment management to a chain of external relationships involving actuaries, investment consultants, and fund managers. These relationships are laced with divergent interests and influence dynamics, which explain why these pension funds give primary emphasis to fund investment performance and display little concern for matters of ownership and corporate governance.Theoretical/Academic ImplicationsThe “New Financial Capitalism” is characterized by ownership concentration, yet at the same time liquidity and a lack of institutional investor engagement with corporations. Findings suggest that the principal‐agent view of the relationship between institutional investors and corporate managers is more assumed than demonstrated. This widely assumed theory of investor ownership and control is shown to be contingent upon the meanings and practices that underpin investment fund management by institutions.Practitioner/Policy ImplicationsShareowner engagement is proposed as a solution to problems of corporate governance. Findings about the relationships within the investment chain undermine the notions of pension funds behaving as owners and upholding corporate governance and accountability. This raises skepticism about realizing aspirations for engaged ownership and shareowner stewardship contained in institutional investors' engagement codes such as the Stewardship Code (2010) and contemporary policy debate in the UK and beyond.

A brief overview of securities class actions and risk management for pension fund trustees

The history of securities class actions and their importance for pension funds is reviewed along with the risk factors that need to be managed by pension trustees including the nature of claims, factors for determining court jurisdiction, legal cost awards, litigation funding and insurance, fiduciary obligations and the need for community of interest.

Decision making by pension fund trustees in the face of demographic and economic shocks: a vignette study

AbstractHow do pension fund trustees deal with demographic and economic shocks? We examine this issue by using a vignette study among pension fund trustees in the Netherlands. Trustees show asymmetric reactions to shocks in the level of reserves of pension funds. Pension premiums are upwardly flexible but trustees are reluctant to decrease premiums. Asymmetries are also revealed by choices regarding the inflation indexation of benefits and changing real (defined) benefits. Asymmetry is not visible in the policy responses to demographic shocks: increases in life expectancy are reflected by taking structural measures for a defined benefit contract: raising pension premiums and the pension age. Furthermore, trustees allow their choices to be affected by the forces of social comparison: the reserve position of their fund compared to the position of other funds has a significant influence in choosing pension fund policy instruments.

Protecting public pension funds from divestment-related lawsuits: Exploring the state laws of the United States

Imagine: You are a public pension fund trustee, employee or investment advisor. The legislature of your state passes a law that requires you to divest some or all of your stock holdings in companies that do business with a specific country. You seek the advice of an outside research firm that specializes in the identification of such companies. You also seek advice from an in-house or contracted counsel to determine the lawful course of action. You then proceed with the state-mandated divestments and sell your holdings. As a result, the fund's performance suffers. Should you, and those who helped you make the divestment decision, be held liable by the pensioners and other beneficiaries claiming that you have breached your fiduciary duty? This article argues not. The article finds that while most states that have divestment laws against companies that do business in Cuba, Iran, Sudan and Syria do provide some level of lawsuit protection for public fund employees, the degree of protection varies significantly. The study ranks the states’ protection levels and proposes that the higher-ranked jurisdictions serve as models for the others.

On being a union-nominated pension fund trustee

On being a union-nominated pension fund trustee

Report review

Report review

Alternative decision models for liability-driven investment

Traditional Asset and Liability Management (ALM) models have been recently recast as Liability-Driven Investment (LDI) models for making integrated finan-cial decisions in pension schemes investment: matching and outperforming liabilities. LDI has become extremely popular as the decision tool of choice for pension funds. The last decade experienced a fall in the equity markets, while bond yields reached low levels. The UK Accounting standard FRS17 (since 2001, replacing SSAP24) requires the assets to be measured by their market value and liabilities to be measured by a projected unit method and a discount rate reflecting the market yields then available on AA rated corporate bonds of appropriate currency and term. When these new regulations were introduced, liabilities became harder to meet. In the case of a deficit, the pension fund trustees and employers have to agree on extra contributions to fill the deficit within 10 years time. Furthermore, deficit or surplus has to be fully included on the balance sheet of the sponsoring company. In the Netherlands and the Nordic countries, LDI models have become established (see C. Dert, 1995 and Drijver, 2005); the United Kingdom, Italy and a few other European countries are close followers of this trend. Traditionally, assets and liabilities were con-sidered separate. In asset management, the aim was to maximize return for a given risk level. However, the matching of the liabilities was not taken into consideration. The main argument was that assets should be made to grow faster than liabilities. The modern integrated approach to LDI considers the cash flow streams for invested assets of fixed-income portfolios enhanced by interest rate swaps and in some cases of swaptions.