Home > News > 2000 > March 2000 > Socially Responsible Investment an an occupational pension scheme's statement of investment principles
Socially Responsible Investment an an occupational pension scheme's statement of investment principles
Statement of Investment Principles
Background
Every pension scheme is required to have a Statement of Investment Principles (SIP) setting out the approach the trustee take to the investment of the scheme's assets. The Pensions Act 1995 sets out a list of specific details which must be covered in this SIP.
However the government is currently in the process of introducing a further requirement, the trustee must state their policy on socially responsible investment.
The issue of socially responsible investment (also known as ethical investment) was first raised by the government in their Green paper issued in December 1998.
In this the DSS proposed that pension scheme trustees should also include in their SIP whether they take into account "any considerations other than financial considerations". Although the wording does not specifically refer to ethical investment, it is mentioned elsewhere in the Consultation Document and the DSS clearly had ethical investment in mind when putting forward this proposal.
Barnett Waddingham feels that including a statement on socially responsible investment in the SIP raises a number of problems. As part of our response to the Green paper we expressed the opinion that making trustees aware of the ethical issues involved in investment was to be encouraged but that there should be no compulsion on trustees to include any ethical comment in their SIP.
Resulting regulations
The government has gone ahead with its proposals on socially responsible investment and in June 1999 it issued new regulations on the subject. These come into effect from 3 July 2000 and stipulate that a pension scheme's SIP must contain clauses on ethical investment and voting rights.
The actual wording of the regulations is as follows:
"(a) the extent (if at all) to which social, environmental or ethical considerations are taken into account in the selection, retention and realisation of investments; and
(b) their [the trustees] policy (if any) in relation to the exercise of the rights (including voting rights) attaching to investments."
Whilst this means that trustees do have to include some comment in their SIP the use of the words "if at all" and "if any" means that they are able to declare a neutral policy. However having such a statement in their SIP may leave them open to challenge from members of the scheme who have strong views on these issues.
Many pension schemes are invested in pooled investment vehicles such as managed funds. The investment manager will have a statement setting out their approach to socially responsible investment and the trustees should make sure they have a copy of this. However it is virtually impossible for these schemes to enforce any type of ethical constraints on the pooled fund. Whilst there are now ethical products on the market it must be recognised that people's ethics vary significantly.
The regulations also fail to take into account the requirements of Trust Law. This requires trustees to act in the best interests of the members of the pension scheme and in normal circumstances this would prohibit any investment restrictions which might impair the investment performance of the assets.
In our view a major problem with the requirement to have an ethical policy is the fact that everyone is different and has different views. Each individual occupational pension scheme covers many members - usually hundreds or thousands of members. We feel it is not possible for the trustees to be able to predict with any confidence even one single view that will be shared by each and every one of those members.
This is important as whilst many members may support ethical aims in principle they may not be happy to see their pension benefits reduced because investment performance is impaired.
A further practical problem is that trustees are not themselves able to carry out research into the ethics of each company they invest in. Whilst there may be companies who have high profiles as being "unethical" in some way, it is very hard to prove that all of the operations of a company, particularly a multinational comply completely with whatever requirements the trustees are considering for their ethical policy.
To date the only schemes Barnett Waddingham have encountered where the trustees have had specific investment mandates reflecting ethical considerations are those where it can reasonably be assumed by the trustees that a specific investment constraint is consistent with the views of all the Scheme members, for example a scheme for clergy.
If trustees of a pension scheme wish to adopt an ethical approach to their investment strategy we recommend that they seek legal advice in conjunction with this.
Action
All pension scheme trustees need make sure they have incorporated clauses into their SIP covering an ethical clause and voting rights before 3 July.
Trustees would be recommended to obtain from their investment manager(s) a copy of a statement of their approach to ethical investment.
Barnett Waddingham, March 2000.