In this paper Waitzer and Sarro examine the role of pension fund trustees in Canada, and how the Supreme Court of Canada has developed a framework for fiduciary duty that has adapted to changing social and governance challenges.
They explain why trustees are increasingly required to take into account longer term issues such as systemic market risk, intergenerational equity and sustainable development, and how this effectively means that trustees are being positioned with public responsibilities as well as private ones. The authors conclude that to fulfil these responsibilities, trustees must take steps to address emerging obligations to beneficiaries, and to collaborate with other market participants to achieve a stable and better investment market for the future benefit of all.
Today, most trustees rely on investment professionals to manage a complex portfolio of financial assets, with the majority of returns coming from general market exposure as opposed to market outperformance. Factors that affect performance of the whole market therefore have a critical influence on fund performance, and there is increasing recognition that long term issues such as intergenerational equity (protecting returns for future as well as current beneficiaries) and sustainable development are relevant concerns. Canada’s approach to fiduciary duty is unusual in that it explicitly aims to not only protect the interests of pension plan beneficiaries, but also to instil public confidence in fiduciary services, thereby supporting the efficient functioning of the financial services sector, economic growth and social wellbeing.
Fiduciaries have two main duties: the duty of care, which for pension fund trustees means they must apply the same skill and diligence that an ordinary person would use when managing the property of another person; and the duty of loyalty, which means that trustees must always act in the best interests of the beneficiaries and act impartially towards multiple beneficiaries with potentially different interests. While the duty of care principle has been criticised for being too vague, over time this vagueness has allowed the principle to adapt and develop to accommodate changing social norms. Similarly, the duty of loyalty principle is increasingly being interpreted as including the beneficiary’s position as a responsible member of society, in addition to financial interests.
“Canada’s approach to fiduciary duty is unusual in that it explicitly aims to not only protect the interests of pension plan beneficiaries, but also to instil public confidence in fiduciary services.”
The paper outlines a number of concepts and recommendations for trustees to support the obligations associated with an expanded framework for fiduciary duty that incorporates public as well as private interests:
Duty of obedience
- This concept reflects the legal trend towards fiduciaries with public responsibilities, as it requires fiduciaries not to undertake actions that reasonably could be perceived as unethical, such as failing to adequately oversee compliance or reporting systems, since such actions could damage public confidence in fiduciary services.
Giving beneficiaries a voice
- Beneficiaries should be given a stronger voice in fund governance, for example via plan member representation on trustee boards, and by giving beneficiaries defined contribution pension plans a voice in choosing their investment options. This would promote transparency towards participants as well as improved understanding by trustees of the interests and preferences of beneficiaries.
Duty to inform and educate
- Beneficiaries should be informed about which assets are held by the fund and how they are being managed to meet the needs of current and future beneficiaries.
Duty to consult
- While trustees, as fiduciaries, must ultimately be responsible for all decisions, consultation with beneficiaries can be strategically important and encourage both transparency and trust. A consultation process, particularly one that takes into account the interests of future beneficiaries (e.g. through the appointment of a ”trust advisor”), increases the likelihood that a trustee fs decisions will be seen as fair and provides evidence of a trustee fs attention to the interests of all beneficiaries.
Duty to be strategic
- Trustees should avoid an excessive focus on short-term risk management and give due attention to long-term strategic and operational issues, such as protecting investment portfolios against potential systemic risks.
Duty to collaborate
- This concept goes to the heart of the broader framework of fiduciary duty and serving public interest in Canada. The development of a “fiduciary society”, where increased complexity makes individuals increasingly reliant on specialized, fiduciary services to achieve desired outcomes, requires collaboration within and between organisations. Pension funds have a responsibility and an opportunity to act collectively, though presently many institutions are reluctant to do so. Activist shareholders are in the minority and many institutions are hiding behind best practice standards and box ticking, which tend to react to past failures rather than anticipate future challenges.
The authors conclude that pension fund trustees must mitigate risk and increase returns by taking a broad view and thinking about how their investment decisions will help bring about those factors recognised as being the long-term drivers of performance: stable financial markets, a stronger economy, and a more sustainable environment.
RI Quarterly Vol. 2: Fiduciary duty
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The public fiduciary: a Canadian perspective