UK and Canadian Pension Fund – Law
Comparative Study of U.K. and Canadian Pension Fund Transparency Practices
4. Relevant U.K. Law Regarding the SEE Issue Disclosure Requirement in the SIP
Introduction
The majority of U.K. pension schemes are trust-based and governed by a board of trustees. This board has a responsibility to administer the scheme in accordance not only with the rules of the scheme but also with a plethora of other rules and regulations derived from a number of different areas of law. These areas include inter alia trust, contract, tax, social security and employment law and the Financial Services Act. The employer sets the scheme rules, with the responsibility for pension schemes falling within the jurisdiction of several government departments. Under common law, pension scheme trustees have a duty of care to “…take such care as an ‘ordinary prudent man’ would take if he were minded to make an investment for the benefit of other people….”6 However, the lack of a comprehensive statutory framework prior to the introduction of the 1995 Pensions Act was a serious cause of concern. This concern crystallized in the 1990s when the loss of pension funds through misappropriation came to light during the collapse of Robert Maxwell’s publishing empire. Prior to the 1995 Pensions Act, schemes were required to supply certain information to members, including benefit statements and scheme details. Other information was to be available on request, including the scheme documents and the annual report. In 1998, John Denham, the then U.K. Parliamentary Under-Secretary of State for Social Security, announced government proposals for further disclosure of the investment policies of pension funds. He also stated that regulations might be introduced to require pension funds to include a specific reference to their policies on socially responsible investment when they set out their SIPs (Denham, 1998). Two years later, an amendment to the 1995 Pensions Act came into effect. From July 3, 2000, occupational pension fund trustees have been required to state in their SIPs 7the extent to which SEE considerations are taken into account in their investment strategies. The following discussion focuses in particular on those sections of the relevant legislation that pertain to the responsibilities of trustees to provide information to their members.Pensions Act 1995
The 1995 Act came into force in 1997, following a pensions law review (Goode, 1993) and effectively codifying trust law and good practice. The Goode committee observed that trustees of pensions funds were “entitled to have a policy on ethical investment and to pursue that policy, as long as they treat the interests of the beneficiaries as paramount and the investment policy is consistent with the standards of care and prudence required by the law.” However, at the time, including discussion of any such policy within the SIP did not become a requirement. The 1995 Pensions Act required that: (1) The trustees of a trust scheme must secure that there is prepared, maintained and from time to time revised a written statement of the principles governing decisions about investments for the purposes of the scheme. (2) The statement must cover, among other things –(a) the trustees' policy for securing compliance with sections 36 and 56, and (b) their policy about the following matters.(3) Those matters are –
(a) the kinds of investments to be held, (b) the balance between different kinds of investments, (c) risk, (d) the expected return on investments, (e) the realisation of investments, and (f) such other matters as may be prescribed.” (Pensions Act, 1995 s.35)Post-1995 Developments Another period of consultation on pension reform commenced in the late 1990s, as part of the government’s Welfare Reform Programme, when John Denham was Parliamentary Under-Secretary of State for Social Security. The consultation document issued by the Minister—Strengthening the Pensions Framework: A Consultation Document (HMSO, 1998a)—introduced the idea of adding disclosure of SEE considerations to the SIP. Views were invited on the following draft proposal:
For the purposes of section 35(3)(f) of the 1995 Act (other matters to be contained in the statement of investment principles), the statement must cover whether the trustees take into account any considerations other than financial considerations, and if so, what these are and how investment decisions are affected. (p. 39)The green paper A New Contract for Welfare: Partnership in Pensions (Cm 4179) also issued in 1998 (HMSO, 1998b) echoed similar sentiments and set out that
[p]ension funds must consider how their funds are invested. The Government believes that, subject to the over-riding requirements of trust law in respect of the interests of the beneficiaries, trustees should feel able to consider moral, social and environmental issues in relation to investments. (Ch. 8, para. 68) We believe that it is right that all trustees should consider how far such issues should affect the way they invest the assets of the pension fund. We believe that the best way to achieve this is the introduction of a regulation under the Pensions Act 1995. Such regulation would require pension fund trustees to set out their policy if any in their statement of investment principles. (Ch. 8, para. 69)In the final draft of the Occupational Pension Schemes (Investment, and Assignment, Forfeiture, Bankruptcy etc.) Amendment Regulations 1999, an additional clause in respect of voting rights was inserted and “considerations other than financial considerations” became much more specific. The relevant amendment required that
[t]he matters prescribed for the purposes of section 35(3)(f) of the 1995 Act (other matters on which trustees must state their policy in their statement of investment principles) are – (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; (b) their policy (if any) in relation to the exercise of the rights (including voting rights) attaching to investments. (1999, SI 1849)Amendments to Related Regulations New regulations also imposed similar requirements upon public sector pension funds, which mandated a
regulation which requires each administering authority to prepare, maintain and publish a written statement of principles governing their policy on investments of pension fund moneys. This statement must cover the same matters as those the trustees of a trust scheme must include in the statement that they are required to prepare under section 35 of the Pensions Act 1995. The statement must also include the authority’s policy on the extent to which social, environmental or ethical considerations are taken into account. (1999, SI 3259)Additionally the requirement was extended to stakeholder pensions, requiring a SIP for schemes not established under trust detailing:
(f) the extent (if at all) to which social, environmental or ethical considerations are taken into account in the selection, retention and realisation of investments. (2000, SI 1403)
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