Pensions Minister gives green signal to consideration of systemic risks by pension schemes; cites active ownership as essential to raising investment levels.
Is consideration of systemic risks to long-term returns such as climate change antithetical or integral to fiduciary duty? This question has divided asset owners across major jurisdictions – but the discussion could be reaching its conclusion, at least in the UK.
This week, UK Pensions Minister Torsten Bell gave his clearest indication yet that forthcoming statutory guidance would draw a line under the matter.
Subject to the deliberations of a working group, the UK government will effectively tell pension scheme trustees that they can – and by implication should – look beyond the traditional boundaries of risk-adjusted returns to fully serve the interests of members.
Speaking at the UK Sustainable Investment and Finance Association’s (UKSIF) annual Ownership Day in London, Bell said he found the continuation of the debate “boring” and not a good use of either trustees’ or lawyers’ time.
“I want to move us on from the place where every two years we have to produce another piece of very well-thought-through legal thinking that tells us it’s fine for trustees to do what in most cases they’re already doing,” he said.
As an adjunct to its Pension Schemes Bill, Bell said the government would legislate to provide clarity about the duties of private pension trustees, asserting the move would enhance stewardship and “make trustees’ jobs easier”, but would not “subordinate returns”.
“It’s about clarifying that, where trustees wish to take wider considerations into account, they can do that. We’re focused on how the law is understood and it’s applied in practice. The guidelines will give trustees that clarity without new legal tests or unnecessary burdens,” he said.
The minister said statutory guidance on fiduciary duty would also help pension schemes to produce stronger sustainability-related disclosures and credible transition plans, “because the trustees can feel confident that they are reporting on climate risks and opportunities as part of getting on with their day job”.
A broader definition
In the investment sphere, fiduciary duty has been defined as the responsibility of intermediaries to focus solely on risks and returns in order to invest in the best interests of the client. This has been interpreted slightly differently across major jurisdictions, with the US being among those taking a narrower approach.
Over the past decade, organisations including the UN Principles for Responsible Investment have tried to broaden and clarify the legal definition of fiduciary duty in major markets. These efforts have sought to give investment institutions reassurance of their right to account for emerging financially material systemic risks, due to their likely impact on the long-term financial outcomes and wellbeing of beneficiaries.
In December, the UK government responded to a proposed amendment to its Pension Schemes Bill by committing to issuing statutory guidance that would clarify how trustees should address systemic risks to portfolio returns.
Climate change is the most cited systemic risk to investors’ long-term returns, due to its potential to negatively impact returns across a diversified portfolio. Others include biodiversity loss, antimicrobial resistance, and rising risks to physical and mental health. Speaking this week, Bell said the new guidance would enable trustees to consider systemic risks “more broadly”.
A 2024 paper issued by the Financial Markets Law Commission sought to give trustees clear guidance, asserting that consideration of the financial impacts of climate change in investment decisions was consistent with trustees’ fiduciary duty. It also described sustainability as “integral” to investment decisions.
In the first quarter of last year, guidance developed by master trust NatWest Cushon and law firm Eversheds Sutherland argued that trustees can legally consider systemic factors such as the future standard of living of scheme members in their investment decisions.
Recent surveys suggest that more asset owners view managing ESG and systemic risks as integral to their responsibilities to beneficiaries, with 61% telling Morningstar’s ‘Voice of the Asset Owner’ survey that ESG considerations go hand in hand with fiduciary duty.
But some have felt that statutory guidance – including detail on approaches to implementation for different types and sizes of pension schemes – is necessary to overcome caution among trustees. Many smaller schemes have been cautious in their approach to addressing climate risks, including those reliant on scenarios from investment consultants, which have underplayed the financial impacts of climate change.
A working group has been established by the Department for Work and Pensions, with participants including the Pensions Regulator (TPR) and UKSIF.
Speaking that this week’s event, UKSIF CEO James Alexander said statutory guidance was important due to the legal protection it would bring to trustees.
“Business as usual”
Bell also indicated that the government would not mandate burdensome transition plans on UK pension schemes, saying it was instead focused on ensuring that listed corporates provide investor-useful information on their approach to the net zero transition.
The UK’s Department for Energy Security and Net Zero ran a consultation in Q3 2025
on the introduction of transition planning requirements for large corporates and financial institutions, with the DWP seeking feedback on requirements for pension funds. The Pensions Regulator (TPR) established a working group to consolidate industry responses, which is due to report to the minister imminently.
Speaking at the UKSIF event after Bell, TPR Climate and Sustainability Lead Mark Hill said that the working group has reached consensus on the value of the transition planning activity but was keen to minimise the subsequent reporting burden on schemes. “The planning activity is the critical bit, but we need to work together in order to have a disclosure regime that is adding value.”
Hill also said effective stewardship and trusteeship were the key tools for addressing financially material impacts of systemic risks, adding that the TPR viewed consideration of systemic risks such as climate change and nature loss as “business as usual”.
Scale matters
Bell said the government’s efforts to consolidate the UK’s public and private pensions sector – under the Pension Schemes Bill – would help to provide the scale and resources needed to invest sustainably and conduct stewardship effectively.
The bill seeks to accelerate consolidation by requiring multi-employer defined contribution (DC) schemes to have at least £25 billion in their main default arrangement by 2030, introducing an automated platform to consolidate “small pots” and forcing the merger of Local Government Pension Scheme funds in England and Wales.
“Scale does matter,” said Bell. “A fragmented pension system is bad for savers because it holds back the delivery of strong returns and lower costs,” said Bell, adding that the larger schemes that would emerge from consolidation will be better able to build the capacity needed to conduct active ownership.
Larger schemes would be more sustainable through being better able to invest in a wider range of assets, and to pursue active ownership in future, he insisted, versus a prevailing approach Bell characterised as more “diffuse and passive” than most other countries.
“We need to see more active ownership – that is also part of the strategy to raise investment levels. Because what we see around the world is you need managers to feel active engagement from their owners to deliver on their potential.”
Free and open competition
The minister denied that provisions in the Pension Schemes Bill to mandate large schemes to invest a minimum level in UK assets would set a dangerous precedent. Bell argued that the bill retained the authority only to ensure delivery on the commitments agreed under the Mansion House Accord.
However, the trade body this week renewed calls for the UK government to withdraw the reserve power, saying it “extends significantly” beyond its stated intention of supporting the accord. The voluntary commitment by 17 of the UK’s largest workplace pension providers involves investing at least 10% of their default funds in private markets by 2030, with 5% of the total allocated to the UK.
“If the mandation power is exercised, it would hamper free and open market competition aimed at driving better saver outcomes and put those outcomes at risk,” said Pensions UK. “Decisions on how savers’ hard-earned money should be invested should not be a political choice.”
The organisation recommended a cap on the percentage of the investment that can be mandated in line with the voluntary accord targets, as well as a reduction in the duration of the sunset clause from 2035 to 2032 to reduce the political risk to schemes.
Photo: Ben Meadows/UKSIF
