Thank you for the opportunity to submit our views on fiduciary duty to the Committee, in advance of my appearance before the Committee. Our views in response to your questions are outlined below, along with some background information about USS.
Universities Superannuation Scheme (USS) was established in 1974 as the principal pension scheme for universities and higher education institutions in the UK. We work with around 330 employers to help build a secure financial future for 528,000 members and their families. We are one of the largest pension schemes in the UK, with total assets of around £75.5bn (at 31 March 2023).
The trustee of USS is Universities Superannuation Scheme Limited. It has overall responsibility for scheme management and administration, led by a non-executive board of directors and employs a team of pension professionals in Liverpool and London. The trustee is regulated by The Pensions Regulator and has a legal duty to ensure that benefits promised to members are paid in full on a timely basis.
The trustee delegates implementation of its investment strategy to a wholly-owned subsidiary – USS Investment Management Limited (USSIM) – which provides in-house investment management and advisory services to the trustee. USSIM manages 70% of the investments in-house and appoints and oversees external investment managers to manage the rest. USSIM is authorised and regulated by the Financial Conduct Authority.
USS is an open hybrid pension scheme, which means we have both a defined benefit (DB) part – the Retirement Income Builder – and a defined contribution (DC) part – the Investment Builder.
1. With respect to how pension schemes take account of climate change risks in their investments, is there a problem that needs fixing?
Climate change is a material financial factor for USS; the anticipated financial impact of climate change is real and will be profound. Given the scale and breadth of our investments, the financial impacts of climate change inherently affect our investments as a whole. We are concerned about a non-Paris aligned transition and believe moving toward a 4-degree world will be inherently bad for the vast majority of financial investments; and even before that point as temperatures rise, the possibility of one or more global tipping points being breached comes in to view. We can’t invest around climate change, and we cannot divest away from it. We therefore seek to be a long-term responsible investor.
Our view is that the current framework does allow us properly to take account of climate change risks in how we invest. We recognise however that we need to continue to test our thinking (reflected by the scenario work discussed below). As we note throughout this submission, as an open hybrid scheme, our ability to consider these issues as a long-term ‘universal owner’ is potentially more straightforward than many others.
We believe the current legal framework provides enough flexibility for trustees properly to consider climate change and other ESG issues in how they invest. Given the risks that climate change poses, we must look at how we best respond to the financial risks. We do recognise that our possible responses may differ from other schemes particularly those with different journey plans and levels of internal resourcing. Individual scheme investment decisions can though only be part of a solution; we need to work with others (including Government, regulators, companies) and need them to take action. As a universal owner, it is only if society moves to ‘net zero’ that we will likely be able to do so.
We welcome the Financial Markets Law Committee’s (FMLC’s) recent contribution to the debate which is a very helpful review of the current legal framework and a reminder of what trustees can positively do within it. The suggestions on what trustees might do, broadly align with how we’re approaching these issues.
The legal purpose of a scheme like ours is to invest in the best financial interests of members for the explicit purpose of paying promised retirement benefits to our members and beneficiaries. We think that the existing framework enables appropriate consideration of climate change as a financial factor within our investment decisions.
A legal change to the definition of fiduciary duty (including extending the definition of ‘best interests’) would create new and unhelpful risks to trustees. We are concerned that placing new duties which compete with the existing and well-established fiduciary duty of pension scheme trustees would create a conflict between duties and be difficult to implement, confuse decision making and increase litigation risks. These issues would not be easy to solve; and could lead to greater risk aversion from trustees, thereby weakening their consideration of climate change.
While our view is that the current fiduciary duty already allows trustees fully to consider the financial materiality of climate change, and invest accordingly, that doesn’t mean we think that more can’t be done. We also recognise that given our long-time horizon and scale we are better placed than many other schemes to consider these issues. Initiatives like the project we undertook with University of Exeter on climate scenarios are key to supporting better informed trustee decision making (including our own). Other initiatives, like the FMLC report, are helpful in encouraging pension scheme trustees (and their advisers) to think more fully about climate change as a financial risk.
When investing, pension scheme trustees act as principal rather than an agent and must invest in the financial best interests of members. This core fiduciary duty does not need change or extension. At the same time, the nature of climate change (and the material financial risk it poses to our assets) does mean that there are some legislative and regulatory opportunities to go further. These could give trustees and their advisors greater encouragement fully to consider climate change as a material financial risk. We would make four suggestions:
Judgement and hindsight. Almost all investments can attract a range of views as to their merits, particularly in hindsight if expectations of performance are not borne out. That makes it especially important that the people who are required to take investment decisions are empowered to act confidently and decisively, properly considering material financial risk. Trustees are entrusted with these decisions. It is right that trustees are open to appropriate challenge around how they are considering the financial best interests of members. However,
litigation risk has increased materially in recent years and is itself a drag on a trustee’s ability to engage fully with climate change. Our direct experience has been that even meritless claims, which are dismissed in the Courts, necessitate time-consuming and expensive defence. This comes at a material cost to a scheme in both financial and wider terms. Experience from outside of the UK is that schemes can face litigation for both ‘not going far enough’ and also for ‘going too far’ in considering climate change materiality risks. This increased risk of litigation is unlikely to help the trustees of many schemes to explore fully climate change as a material financial issue and apply that to their investment approach.
A full ‘safe harbour’ for trustees in respect of their engagement with climate change risks in their investment approach may be neither appropriate nor realistic. However, there are opportunities for Government and regulators to build on the FMLC’s work to give trustees greater assurance that their engagement with climate change as a financial risk will not face unfounded or misguided litigation.
We look forward to discussing these issues in more detail with the Committee at Wednesday’s session and would like to thank the Committee for the opportunity to share our views. Please let us know if there is any additional information we can provide in the meantime.
February 2024