Time for reform of the duties of pension trustees – because a quick buck is not the basis on which to build our future

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I'm going to the launch event for a new report this afternoon. Issued by the Fair Pensions campaign, it's on a them with which I have a lot of sympathy - which is the need to reform the duty of institutional investors when they undertake their work. As the Fair pensions campaign says of the report:

New research by FairPensions calls for an ‘enlightened fiduciary' model for institutional investors to parallel the new duties of company directors introduced in 2006. The report argues that such a provision would provide a valuable ‘nudge' towards sustainable, long term investment to overcome narrow interpretations of fiduciary obligation which emphasise profit maximisation at the exclusion of all other factors, including financial system stability.

According to the report, which was funded by the Nuffield Foundation, intense debates about corporate governance since the financial crisis have paid insufficient attention to the underlying savers whom fiduciary obligations exist to protect.

Christine Berry, author of the report, said that "There's been a lot of talk about the relationship between asset managers and asset owners, but little about the ultimate beneficiaries. There is an urgent need to refocus debate onto the individuals whose money is at stake."

FairPensions, which campaigns for transparency and accountability in finance, argues that current interpretations of fiduciary obligation have lost sight of the core ‘duty of loyalty' to beneficiaries. The complex chains of financial intermediaries involved in today's pension investment have introduced widespread conflicts of interest which are inconsistent with a strict understanding of fiduciary obligation. The report calls on regulators to confirm that asset managers, investment consultants and insurance companies providing pension products are all fiduciaries by law.

Ms Berry went on to say that "From 2000-2009, pension investment returns collapsed to 1.1% per year while funds' payments to intermediaries rose by more than 50%. Against this backdrop the industry needs to ask itself whether it is truly fulfilling its fiduciary obligations to beneficiaries. The current situation simply does not offer enough protection for savers from self-serving or reckless behaviour by their agents."The report, which is being launched with a keynote speech from government minister Ed Davey MP, will call on the government to give savers more say in how their money is managed and to promote long term thinking in order to protect the savings of beneficiaries.

The research also highlights the part that investors played in the financial crisis of 2008. FairPensions points out that, unlike bankers, the people managing pension savings have emerged from the financial crisis with their reputations virtually unscathed despite evidence of their significant role in encouraging risky corporate behaviour in the build up to the crash

I wholeheartedly encourage reform in this area of pension law. It is absurd that pension funds have to invest for the long term and yet pursue short term profit goals. It is equally absurd that professional trustees must ignore social responsibility issues in the interest of making a quick buck.

This is a campaign that deserves to achieve success quickly.

To illustrate the point, a couple of observations on the report:

"Fiduciary duty is the foundation of our capital markets. It is in need of repair. This report surveys the flaws and the work to be done. The report deserves to be widely read and the questions it poses deserve carefully considered response."

-Anne Simpson, Senior Faculty Fellow, Yale and Senior Portfolio Manager, CalPERS

"Despite the hard work of many pension trustees, there is no denying the disappointing returns of the last decade. The 2008 financial crisis was a particularly nasty shock. Our report challenges the view that what happened was just bad luck. Rather, the detailed research behind this report suggests we urgently need to shake up what is expected of the layers of agents involved in investing other people's pension savings."

- Catherine Howarth, CEO FairPensions

The report is available here.

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