The Fair Pension campaign's launch of its new report on fiduciary duty is fascinating.
In the pension context they argue that the prevailing interpretations of fiduciary obligation have lost their way, neglecting the core duty of loyalty — including the duty to avoid conflicts of interest — in favour of a narrow focus on maximising returns.
And as they argue, nowhere, anywhere, is there a legal duty that this power be used to maximise returns. That means in statute or in case law. And they've sought advice from heavy weight lawyers to check they're right.
But in that case, they ask, why do trustees think the latter is true? Who persuaded them of it? Why do they act on it as if it is true?
And how come despite the fact that trutees believe this fiction is it that investment charges charges have risen in real terms by 50% over the last decade but the average rate of return they have generated despite their claim to be maximising returns is just 1.1% per annum (and I think that's before charges) over the same period?
The reality is that the current structure of pensions has been moulded to suit the needs of the City and its capture by neoliberal thinking that puts short term goals at its heart and which, quite literally, discounts the future. And yet it is that future for which pensions are invested.
It's been very obvious for a long time that there was an inherent conflict at the core of pension management. Full marks to Fair Pensions for very ably exposing it.
And note - company directors also have fiduciary duty - and they have perverted it too. There is, for example, no obligation for them to minimise tax - that's not a requirement in any UK law - and I suspect you may also find it hard to pin down in US law too. This is just convenient urban myth created to justify the abuse of shareholders, the long term and real investor needs and all for the benefit of management - who are probably acting in breach of their fiduciary duty.
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There is a duty on directors to maximise shareholder value, albeit not, as is all too often insinuated, exclusively and to the detriment of all else. One way of doing that is to exercise legitimate tax planning. You’ve made the point before, and I agree, that this doesn’t include aggressive strategies that can risk long term problems in defensive costs and the intangible impact of a negative relationship with HMRC and, I’d add, severe adverse publicity. So the principle that tax should be minimised, whe the law allows it, is correct, but how far to go is a matter of judgement.
@Lee T
Well that’s the same as me saying:
Tax compliance is seeking to pay the right amount of tax (but no more) in the right place at the right time where right means that the economic substance of the transactions undertaken coincides with the place and form in which they are reported for taxation purposes.
That’s judgement too – but nothing like tax avoidance or even minimising tax
It’s paying the right sum
Semantics, Richard. I agree with you (albeit that the notion that tax should be paid where the substance if the activity exists is not part of our tax law), and that right-wing justifications for aggressive tax planning are based on a skewed interpretation of the law… but in the absence of rules to the contrary the view that the minimum amount of tax IS the right amount of tax is as valid as any other. In practice it is futile to expect companies to pay anything more than they believe that they have to.
Lee, I agree that there is a load of nonsense written about directors’ duties so as to justify any amount of tax avoidance, but the general duty is to promote the success of the company for the benefit of its members.
As you say that is not exclusive and should be read in the context, amongst other things, of having a reputation for high business standards. Within these constraints maximising profits on a long term basis may be the way to discharge the duties, but I cannot see that this will always mean reducing the tax bill to the lowest possible amount, which is I think what you and Richard are saying.
Richard, this is somewhat off the track of the main point of the blog post but I keep reading that the only duty of the directors is to deliver the best return for the shareholders and hence they are forced to engage in tax avoidance. Just not true.