Pension trustees do not always have to be driven by the need to maximise short-term returns at the expense of risks over the longer term, the Law Commission has said.

In its latest report, Fiduciary Duties of Investment Intermediaries, the Commission said pension trustees should invest to secure the best realistic return over the long-term.

In response to concerns raised in the 2012 Kay Review, that uncertainty about their legal duties leads investors to focus on short-term movements in share price over long term investments, the report also asks whether trustees of trust based pensions can make investment decisions motivated by non-financial concerns.

The Commission concluded trustees should take into account factors which are financially material to the performance of an investment. Where trustees think ethical or ESG issues are financially material, they should also take these into account.

The report also examined contract-based pensions, which do not have trustees, and the extent to which providers are under a duty to act in the best interests of members.

In relation to the government’s planned 2017 review of the default fund charge cap, the Commission said the review should “specifically consider whether the cap on fund management charges encourages investment managers to choose short-term trading over long-term investments, and if so, what can be done to address this”.

A statutory duty on independent governance committees to act with reasonable care and skill in members’ interests has also been recommended.

Law Commissioner for commercial and common law David Hertzell said “there is mounting evidence that companies which treat their customers and suppliers well do better in the long-term”.

“The law does not prevent trustees from taking a long-term view when setting investment strategies. They are free to take account of environmental, social and governance issues or ethical factors where they are financially material, or where the tests we have set out are satisfied.”

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