Permitted or Required? Pension Trustees and the System-Level Risk They Create

Twice in two years the UK Government has described the fiduciary duty of pension trustees as permissive. In April 2025 the Department for Work and Pensions said that the findings of the Law Commission review of investment intermediaries ‘reflect the permissive nature of trustee fiduciary duty’, and the Government was ‘not currently considering any change to the law’. In January 2026 the Department committed to guidance giving trustees ‘clarification and practical support on their ability to take account of system level risks, such as climate related risks’. Both statements answer a real question. Neither answers the harder one, which arises when the system-level risk is produced by the investment strategies of trustees themselves.

The 2022 gilt market episode is the clearest recent illustration. Defined benefit schemes used liability-driven investment strategies to hedge long-term interest rate and inflation exposure. Sharp increases in gilt yields triggered collateral and margin calls, and schemes sold assets to meet them. The Bank of England later found that many liability-driven investment funds were not sufficiently prepared for movements of that size, and that stress testing had not adequately considered what would happen if many market participants reacted at the same time. The strategy adopted by any single scheme was defensible. The damage came from the aggregate.

What followed is equally instructive for lawyers. Emergency intervention was succeeded by a binding requirement set at the level of the market rather than the scheme. In April 2024 the Central Bank of Ireland, acting alongside Luxembourg and following coordination with UK and European authorities, imposed minimum yield buffers on GBP-denominated liability-driven investment funds, calibrated to withstand a 300-basis point rise in UK yields. Resilience that individual investment duties had not delivered was supplied instead by macroprudential rule.

On this blog in October 2022, Iain MacNeil asked whether trustees and asset managers faced legal risk over liability-driven investment, framing the issue around proper purpose and the duty of care. That question measures the conduct of each scheme against duties each scheme already owed, and it remains a good question. A different one sits a level above it, and the guidance promised for 2026 makes that different question live.

The circumstances a trustee must consider

Section 36(4) of the Pensions Act 1995 requires trustees who retain an investment to determine at what intervals ‘the circumstances, and in particular the nature of the investment’ make it desirable to obtain fresh advice, and then to obtain and consider that advice. The provision does not define the relevant circumstances. In Nestle v National Westminster Bank, the Court of Appeal held that prudent investment depends on the economic and financial conditions prevailing at the time, and declined to judge trustees with hindsight. Neither authority tells us how wide the relevant circumstances reach.

The question, then, is whether the foreseeable hedging behaviour of several hundred similarly situated schemes forms part of those circumstances. If it does, system-level risk enters the individual duty without anyone having to invent a trustee duty owed to the financial system. It enters because correlated conduct alters the risk borne by the very beneficiaries whom the duty already protects. Framed that way, this is a problem of ordinary trust and pensions law rather than of financial stability policy, and it is capable of being answered by the existing statutory language.

Why permissive is the wrong frame here

The permissive framing has a respectable pedigree. It was developed for factors that a trustee may take into account, and it works well for risks originating outside the investment process. Climate risk, the example chosen in the January 2026 answer, is the paradigm case. No single scheme causes it, and every scheme is exposed to it. Permission is exactly what trustees needed, and the Law Commission supplied it.

Risk generated inside the investment process behaves differently. Where the strategy of a scheme is one of the inputs producing the aggregate exposure, telling trustees that they are permitted to notice the aggregate is a curious answer. The 2022 episode was not a shock arriving from outside the pensions sector. It was, in substantial part, the pensions sector responding to a shock in a correlated way, using hedging tools chosen for prudential reasons and recommended by the same small group of advisers. That distinction between system-level risk arising outside the sector and system-level risk generated within it is doing real work, and the promised guidance does not yet acknowledge it.

Two limits keep the argument modest. Trustees should not be expected to have forecast the aggregate, and nothing here implies that duties are owed to the market at large. Equally, the individual duty runs out. A trustee cannot control the behaviour of competitors, and cannot properly accept worse outcomes for beneficiaries in order to stabilise a market shared with them. Beyond that point, responsibility belongs with prudential and macroprudential regulation, which is precisely what the 2024 yield buffers represent. Identifying where that boundary falls is the substantial legal question, and it is not answered by describing the duty as permissive.

The pensions question is one instance of a general one. Non-bank financial intermediation now accounts for more than half of global financial assets. Banks operate under an international prudential framework built on the understanding that individually rational decisions by large institutions can destabilise the wider system. Non-bank finance relies instead on sector-specific rules, soft law standards and cross-border coordination, none of which speaks directly to the content of the duty owed by the institution at the centre of the problem. The legal architecture for collective risk has not kept pace with where the assets have moved.

The guidance promised in January 2026 is an opportunity to address what the permissive framing leaves unresolved. The question worth answering is when foreseeable correlated behaviour becomes a circumstance that trustees must consider, and at what point the honest answer is that the risk has stopped being a matter of trustee duty at all.

Lincoln Booth is an MSc in Taxation candidate at the University of Oxford, and holds an MBA from the University of Cambridge.