By Philip Bennett

This paper outlines the legal rules that regulate the investment of the assets of an English law occupational pension scheme set up under trust where the investment powers over those assets are held by the scheme trustee. Those rules derive from a combination of EU Directives (in particular, Article 18 of Directive 2003/41/EC (the “IORP I Directive”) replaced by Article 19 of Directive 2016/2341 (the “IORP II Directive”)), UK legislation transposing those Directives and adding further rules and English trust law. The paper looks at whether the trustee owes duties to the sponsoring employer when investing scheme assets. It notes that the duty to act in the best interests of the beneficiaries has been subject to recent judicial analysis, clarification and reframing in 2 English Court decisions. It considers whether the prudent person rule which applies when investing the assets of an English law trust requires the trustee to take account of material environmental, governance and social factors (“ESG factors”). It notes that Article 18 of the IORP I Directive and Article 19 of the IORP II Directive (which replaced Article 18) require that the assets of institutions for occupational retirement provision (“IORPs”) must be invested in accordance with the overriding requirement of the “the prudent person rule” but that the author has not identified any analysis as to whether this rule is to be given a different meaning to its English law meaning in other EU member states. It looks at some practical legal risk management techniques for complying with the legal rules on investing pension scheme assets. The paper goes on to look at some of the difficulties as to extent to which trustees may take account of members’ views and, if members’ views are to be taken into account how they should be evaluated. The paper considers the circumstances in which members’ views can be taken into account in the selection of investment options for member retirement accounts in money purchase schemes or in the money purchase section of a defined benefit occupational pension scheme. Within the applicable legal rules the paper then considers whether the Law Commission’s conclusion, in its report on ‘Pension Funds and Social Investment’ of 22nd June, 2017, is correct that the pension scheme trustee may take account of ESG factors which have an adverse impact on risk adjusted investment return so long as the impact is not material.

Source: SSRN