Government consults on fiduciary duties guidance

The Department for Work and Pensions is consulting on draft guidance as to trustees' investment duties.

The draft emphasises that it does not change the law or create new obligations. Its tenor is nonetheless expansive. It suggests that fiduciary duty can accommodate a wide range of long-term and systemic issues if financially material, although proportionality is emphasised throughout.

Background

During the passage of what became the Pension Schemes Act 2026, the Government announced plans for statutory guidance on trustees' investment duties. An amendment to the Bill was tabled to create the necessary framework, but the House of Lords rejected it, amid concerns about Government influence over investment decisions.

The guidance now proposed is therefore non-statutory. However, the Government expects trustees to take it into account, and will consider putting it on a statutory footing in due course.

The drafting was led by a working group chaired by Sir Robin Knowles, a High Court judge. The guidance builds on papers published by the Law Commission in 2014 and 2017, and by the Financial Markets Law Committee in 2024. Sir Robin was chair of the FMLC's working group.

Key points

• Financially material considerations: A matter is financially material if it is reasonably capable of affecting risk, returns or outcomes for the fund. It may be direct or indirect, certain or uncertain, and may arise at asset, portfolio, system or economy level. Trustees should not dismiss an issue merely because it is uncertain or hard to quantify, or because it seems "too small to make a difference". They should work with multiple time horizons, up to the lifetime of members.
• System-level risks: Where proportionate, trustees should consider risks such as climate and nature, conflict, financial system risk and AI. Notably, they should consider what could happen if others took the same investment view. Collective action may be more effective than acting alone.
• Future costs and circumstances of living: Factors affecting members' future living costs, and so the real value of their pensions, can be financially material where there is a "credible connection" to retirement outcomes.
• Non-financial matters: These will sometimes be relevant to investment decisions, but only unusually. The draft restates the Law Commission's two-part test: trustees should have good reason to think members would share the concern, and the decision should not risk significant financial detriment to the fund. A blanket refusal to take account of non-financial matters, regardless of harm, would not be appropriate.
• Taking decisions: Trustees can and should make judgment calls; undue caution should be avoided. Trustees will not be judged with hindsight. They should challenge advice, use scenario analysis where proportionate, and record their reasons. Qualitative analysis can be as important as numbers.
• Stewardship and member views: Stewardship forms part of investment decision-making, and trustees should assess how effective their managers' engagement is. Collaboration with other schemes is encouraged. Trustees need not seek member views, and are not bound by them if they do.
• Delegation and transactions: Trustees should set clear mandates for advisers and managers. Financially material factors remain relevant when investing through pooled funds, transferring to a master trust, or effecting a buy-in or buy-out. In the last two cases, trustees may look at the long-term investment approach of the receiving scheme or insurer.

An annex gives illustrative examples, ranging from climate and nature to AI and energy infrastructure.

The consultation closes on 28 January 2027. The Government will publish its response alongside the final guidance, expected by Q2 2027.

Comment

The guidance is not intended to move the goalposts, but three elements could nudge trustees towards a broader view of financial materiality than some might otherwise take:

• the "what if others did the same" analysis;
• the treatment of members’ future living costs as potentially material; and
• the express recognition that a buy-out or master trust transfer is itself an investment decision, to which the same considerations apply.

As regards non-financial matters, the restatement of the Law Commission's two-part test might seem uncontroversial. However, many respected lawyers have taken issue with the test. A flag to that effect was included in the FMLC's 2024 paper. No such flag appears in the guidance; the draft says only that, "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". Given the legal uncertainties, we would suggest that, in such circumstances, advice will be essential.