Digital Assets: An Emerging Asset Class for UK Pension Schemes

Global institutional interest in digital assets is increasing and there are early signs of engagement from some UK pension schemes. As explored in our recent article, “Legally bold? A lawyer’s lens on alternative investments for pension schemes”, trustees are increasingly considering alternative asset classes in search of diversification and enhanced returns, and digital assets represent a developing part of that wider trend. In this article, we focus on the key legal considerations for pension trustees considering investment in digital assets.

A recent survey highlighted in Pensions Expert last month shows that some larger institutional investors, including pension funds, are increasingly interested in digital assets. The Northern Trust survey, based on a global client base of 180 investors, has shown that nearly half of large asset owners now have some form of cryptocurrency exposure.

Investment in digital assets still tends to be highly speculative and volatile and may not always be reliably valued. The regulatory environment is continuing to evolve and a new crypto asset regime regulated by the FCA is expected to be introduced in phases, with key elements anticipated from 2027. In addition, there are concerns around how such assets are valued, combined with the potential legal and regulatory risks faced by trustees considering cryptocurrency investment.

Are UK pension schemes investing in cryptocurrencies?

Whilst we know that an unnamed £50m UK pension scheme, advised by Cartwright Pension Trusts, made a 3% allocation to Bitcoin in 2024, UK pension scheme exposure to cryptocurrencies remains very low compared to the overall global position.

Research suggests that where pension schemes are engaging with such assets, this is typically through small, carefully controlled allocations and often made indirectly. UK occupational pension scheme investment in digital assets therefore remains at an early stage, with trustees generally adopting a cautious, governance-led approach as outlined in our earlier analysis of alternative investments.

The key legal issues for trustees

Trustees have well-established duties to exercise their investment powers for proper purposes and in members’ best financial interests. The principles in the Cowan v Scargill and Re Whiteley cases are still fundamental to trustee investment decisions: trustees must effectively not subordinate beneficiaries’ interests to their own views and they need to act prudently. That creates a significant bar for investment in highly speculative, volatile assets. Whilst trustee liability can often be excluded or restricted, it cannot be excluded for breach of their duties to act with reasonable care and skill in the performance of their investment functions.

Trustees are also required under the Pensions Act 1995 to obtain and consider written advice from a regulated investment adviser before making investment decisions. Any decision to invest in digital assets would require professional advice, and trustees should document clearly the reasons for investing, the professional advice taken, and how such a decision is in members’ best financial interests, in line with the broader governance expectations applicable to alternative investments.

One key area for advice is the distinction between different types of digital asset, which can have very different risk and return profiles, from bitcoin to stablecoins to memecoins. Historically, there may be a tendency to treat all digital assets as a group, but a more nuanced approach is beginning to be taken here.

Scheme rules, SIPs and governance

Trustees also need to consider whether they have power under the trust deed and rules and the scheme’s statement of investment principles (SIP) to invest. They should take advice on whether the investment powers under the rules are wide enough, consider their statutory powers and review the SIP.

Whilst statutory investment powers are relatively broad, the precise wording of the rules would need to be reviewed carefully to determine whether the relevant powers are sufficiently broad to permit digital asset investment. If the rules are not wide enough, amendment may be possible, but this would be subject to (usually) obtaining prior trustee and principal employer agreement, reviewing the amendment power in the rules and considering whether those amendments are appropriate in the context of the trustee’s wider fiduciary duties, discussed above. 

ESG and stewardship considerations

As well as the SIP and scheme rules, trustees need to consider how the investment meets any other criteria in the scheme’s investment policies, in particular any ESG policies which may apply.

While the scale and significance of bitcoin’s carbon footprint is debated, there are potential environmental risks given that mining can require substantial amounts of electricity. This should, however, be balanced with any potential gains such as potentially helping to rebalance electrical grids and incentivising sustainable power production. Trustees need to take seriously whether digital asset investment or, indeed, non-investment is in breach of the scheme’s ESG policies – they would need to consider whether the ESG issues raised are financially material to the investment decision and how such considerations sit alongside the scheme’s existing investment policies, echoing the increasing importance of ESG integration across alternative asset classes more generally.

As noted in our article “Integrating ESG for DC pension schemes – Key Considerations for DC Trustees”, trustees need to integrate ESG considerations into their investment strategies to manage long-term financial risks to the scheme. In practice, that means carefully documenting any decision-making and ensuring trustees have the knowledge and training on the scheme’s investment policies and any associated financial risks of investing in cryptocurrencies.

Volatility and diversification: the regulatory requirements

Crypto markets have experienced very significant price volatility, including substantial annual, and even daily, price swings. Whilst high volatility may offer significant financial upside, it also creates obvious risks of large losses over a short time horizon and potential concentration risks, particularly in the context of long-term pension liabilities.

With that in mind, trustees need to keep in mind the diversification requirements in the Occupational Pension Scheme (Investment Regulations) 2005 when choosing investments. These include requirements scheme assets must be properly diversified to avoid excessive reliance on a particular asset, issuer or group of businesses and avoiding accumulations of risk in the portfolio as a whole, reinforcing the importance of diversification principles highlighted in our article above.

A related point is that those regulations require trustees to ensure that assets of the scheme are “predominantly” invested on regulated markets and investments which are not on regulated markets need to be kept to a “prudent level”. Whilst digital assets continue to evolve, any direct investment in cryptocurrencies would need to be carefully considered with that framework in mind.

Some practical steps for trustees

In short, pension schemes may be able to invest in digital assets, but this is subject to having robust and flexible governance structures which help ensure trustees act in the best financial interests of members, and this should be viewed as part of a broader, carefully managed approach to alternative investments rather than a standalone decision. In practice, this includes:

• Actively considering both the advantages and the disadvantages of such an investment in the context of the pension scheme’s objectives.
• Reviewing the scheme’s investment powers carefully.
• Considering whether the SIP permits the investment and whether it would need updating.
• Ensuring decisions are carefully documented and minuted.
• Obtaining appropriate legal and investment advice and seeking training to ensure trustees’ knowledge and understanding in this evolving area is kept up to date.

Maintaining a robust documentation trail and clear governance processes on investment decisions will therefore be crucial. If members were to disagree with trustee investment decisions (particularly if those decisions resulted in significant losses), trustees need to be able to show they have followed proper decision-making procedures.

This remains a rapidly developing area for pension scheme investment and one that raises significant legal and governance considerations for trustees. Given the legal and governance hurdles involved, schemes considering any exposure to digital assets should take appropriate advice at an early stage, particularly in light of the heightened risks associated with this asset class when compared to more established alternative investments. Interestingly, many schemes may already have indirect digital asset exposure without realising it, such as through a global equity index fund which holds shares in companies linked to digital asset holdings.

Overall, the broad principle remains that trustees should apply the same governance and operational standards to digital asset investments as they would to any other asset class, with the same core disciplines of understanding the investment rationale, assessing risk and return, ensuring appropriate diversification and taking appropriate advice.

In that context, some advisers see a limited but emerging role for digital assets in well-governed portfolios. Sam Roberts, Director of Investment Consulting at Cartwright Pension Trusts, notes that: “For the right schemes, with disciplined and robust governance processes in place, a modest allocation to digital assets can form part of a wider diversified portfolio and provide exposure to a differentiated risk-return profile. As trustees look for innovative ways to build resilient portfolios for the long term, this is a discussion that is only likely to become more important.”

Burges Salmon is well-placed to advise on the legal and governance issues surrounding pension scheme investment in digital assets. For further information, please contact Jack Gillions or Steven Hull.

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This article was co-written by Jack Gillions and Kate Burgess. 

For the right schemes, with disciplined and robust governance processes in place, a modest allocation to digital assets can form part of a wider diversified portfolio and provide exposure to a differentiated risk-return profile. As trustees look for innovative ways to build resilient portfolios for the long term, this is a discussion that is only likely to become more important." Sam Roberts, Director of Investment Consulting, Cartwright Pension Trusts