UK: Pension Fund Investment: What Exactly Are "Members' Best Interests"?

Last Updated: 1 December 2015
Article by Kris Weber

Trustees' duties are to act in the best interests of their beneficiaries – everybody knows that. And "best interests" of course, generally means best financial interests. But what about where there is more to a matter than financial considerations – ethical investments, for example, where trustees might wish to take a decision on more subjective grounds and then impute to scheme members the desire for financial considerations to play second fiddle? Just how thin is the ice that they're standing on...

Arthur Scargill, thirty years on

This year marks the thirtieth anniversary of the ground-breaking decision of the High Court in Cowan v Scargill, in which it held that trustees' personal, subjective views about the ethical (or indeed unethical) nature of a particular investment could rarely 'trump' their duty to act in the best interests, i.e. best financial interests, of a scheme's beneficiaries.

The case concerned the investments to be undertaken by the trustees of the National Coal Board pension fund (and yes, the "Scargill" is indeed the Barnsley FC supporter you are thinking of) and was concerned, in particular, with whether the trustees could properly decide not to invest in anything that was in competition with the coal industry, even though doing so might result in lower financial returns than might otherwise have been the case. Remember, for context, that the events in question took place in the early 1980s at the height of the miners' strike, shortly after Margaret Thatcher had been elected as Prime Minister and at a time when "flying pickets" were being bussed around the UK to prevent miners who wished to work from crossing picket lines; and tensions were running high. The specific purpose of the investment strategy was to further the business prospects of those involved with UK coal. It was challenged by the employer-nominated trustees on the board, who felt that the strategy – which was heavily influenced by the National Union of Mineworkers' political views – was of doubtful legal veracity.

The court made it quite clear just how far trustees could go, in letting their subjective views about a particular investment take precedence over their duty to the fund's beneficiaries:

"The starting point is the duty of trustees to exercise their powers in the best interests of the present and future beneficiaries of the trust...

This duty of the trustees towards their beneficiaries is paramount. They must, of course, obey the law; but subject to that, they must put the interests of their beneficiaries first. When the purpose of the trust is to provide financial benefits for the beneficiaries, as is usually the case, the best interests of the beneficiaries are normally their best financial interests. In the case of a power of investment, as in the present case, the power must be exercised so as to yield the best return for the beneficiaries, judged in relation to the risks of the investments in question; and the prospects of the yield of income and capital appreciation both have to be considered in judging the return from the investment...

In considering what investments to make trustees must put on one side their own personal interests and views. Trustees may have strongly held social or political views. They may be firmly opposed to any investment in [examples given]. In the conduct of their own affairs, of course, they are free to abstain from making any such investments. Yet under a trust, if investments of this type would be more beneficial to the beneficiaries than other investments, the trustees must not refrain from making the investments by reason of the views that they hold."

Back to the future

Fast-forward thirty years, maybe courtesy of a flying Delorean DMC-12 (a car manufactured in Northern Ireland and made predominantly out of fibreglass), and Marty McFly and the mad professor would clearly be intrigued to find themselves reading a report by the Law Commission which rather seemed to be going over old ground.

The Law Commission's report, published during summer 2014, had its roots in the Kay Review of UK Equity Markets, which found there to be considerable uncertainty in relation to investment decisions and the application of fiduciary duties. As a consequence the Government instructed the Law Commission to investigate fiduciary duties, including the extent to which fiduciaries (such as pension trustees) may, or must, consider:

  • Factors relevant to long-term investment performance which might not have an immediate financial impact, including questions of sustainability or environmental and social impact;
  • Interests beyond the maximisation of financial return; and
  • Generally-prevailing ethical standards, and/or the (actual or likely) ethical views of (some or all of) their beneficiaries, even where these might run counter to those persons' immediate financial interests.

The report concluded that trustees should take into account factors which are financially material to the performance of an investment, including long-term considerations. Where trustees think that ethical or ESG (environmental, social and governance) issues are financially material they should take them into account. The report also stated the Law Commission's conclusion that, whilst the pursuit of a financial return should be the predominant concern of pension trustees, the law is sufficiently flexible to allow other, non-financial concerns to be taken into account provided trustees have good reason to think that scheme members share their view, and that there is no risk of significant financial detriment to the fund.

All of which, to me at least, seems eminently sensible. So why, therefore, have some recent press reports made such a big deal about how the Government has rubbished the Law Commission's proposals and recommendations?

Government consultation: fiduciary duties in an investment context

With all due respect to the popular press (and I'd be the first to admit that a little bit of racy hyperbole makes a good story!), the Government has actually done nothing of the sort. The Government was asked by the Law Commission to investigate two particular angles arising from the report, which it has done. The Government has, of course, now decided to do nothing about them (in light of the consultation exercise, to which I shall turn in a minute). But to suggest that the whole Law Commission report is on shaky ground would, I think, be a tad unfair.

The Government's consultation exercise focused on:

  • Whether what is now a statutory requirement under regulation 4 of the 2005 Investment Regulations, to invest in the best interests of members (and other beneficiaries), should be extended to pension schemes with fewer than 100 members (which are currently carved out of this obligation by virtue of regulation 7); and
  • Whether the requirement under regulation 2 to refer in a scheme's Statement of Investment Principles, to the extent to which "social, environmental or ethical considerations" are taken into account in the selection, retention and/or realisation of investments, should be clarified so that it more accurately reflects the distinction drawn by the Law Commission between financial and non-financial factors.

The Government recently published the outcome of the consultation exercise and its conclusions that, in the light of the responses received, no changes to the law were felt necessary.

Insofar as investing in the best interests of beneficiaries is concerned, the Government felt that no action was necessary because 'smaller' schemes already seem to be complying with the requirements of regulation 4 (as part of their general trust law duties). And whilst it did express general support for the Law Commission's recommendations relating to non-financial factors in investment decisions, the Government felt that the diversity of responses – coupled with it not being clear how the actual drafting of the regulation could be improved – tended towards a "leave well alone" approach to this issue.

So where does that leave us?

No further forwards, on one interpretation. Confusion and misunderstanding over the extent to which pension trustees should be considering long-term environmental issues when investing their fund's assets may well perpetuate.

However, whilst the law is rarely perfect (and certainly isn't here), if it isn't too badly broken why try to fix it?

Added to which, the Law Commission's work seems in any event to be having a beneficial impact. In particular, the Government feels that the evidence demonstrates how pension trustees do now have a good awareness of their duty to consider factors, including ESG factors, which may be material to the performance of their investments over the longer-term. And down on the South Coast, the Pensions Regulator has been hard at work updating its trustee training materials; is currently updating its DC Code of Practice; and will in due course, we understand, be incorporating the Law Commission's findings into its investment guidance more generally.

So we might, after all, be in a better position than we used to be. And at least from a cognitive perspective, trustees do seem increasingly aware of the existence of these issues, even if answers to them are still eluding all of us.

If in the future Deep Thought (or, for that matter, HM Government) should find us a more definitive conclusion, we shall be the first to let you know!

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.