How Funds Are Invested

“36. We said in our response to the Consultation Document, Strengthening the Pensions Framework, that the original suggestion in July 1998 that the Government was considering requiring trustees to disclose, in their Statement of Investment Principles (SIP), the extent to which they had taken account of ethical and social considerations in their investment strategy caused considerable concern amongst pension scheme trustees. It would have been possible that scheme members with particular moral, social or ‘ethical’ beliefs could attempt to influence trustees’ investment strategies. Employers sponsoring final salary schemes were concerned that trustee boards could have used the proposed new policy to act irresponsibly, to the financial detriment of the fund. The sponsoring company would then have been required to make good any shortfall and, against that background, there was a significant risk that employers would be unwilling to continue to underwrite the final salary promise. The wording proposed in the Consultation Document gave the NAPF less cause for concern because we considered it to be sufficiently flexible to re-assure employers that it could not be used to justify imprudent investment decisions by trustees with strong personal social/moral/ethical viewpoints. This continues to be our view.

“37. The phrase ‘non-financial considerations’ is the only term which we regard as being sufficiently broad as not to restrict trustees’ investment powers. We would be strongly opposed to the use in regulations of such terms as ‘socially responsible investment’ or ‘ethical investment’ unless the term or terms were clearly defined. Trustees would be placed in an impossible position if they were required to state their policies towards ‘socially responsible’ or ‘ethical’ investments if the terms were not defined. The scope for litigation in these circumstances would be immense.

“38. There would also be a detrimental effect on investment returns. The SIP, once agreed, is binding on the trustees and investment managers. If any restrictions are incorporated in the SIP, investment managers will have no alternative but to screen the stocks in which they invest. They will not be able to manage a portfolio so as to produce the best financial returns for the trustees. This will inevitably lead to under-performance and consequently will be contrary to the best financial interests of the beneficiaries. The NAPF would much prefer the Government not to proceed with an ‘ethical investment’ regulation as we believe this is both unnecessary and potentially unhelpful. However, if the Government decides to proceed it is imperative to retain the wording proposed in the Consultation Document and to avoid the use of terms which, in our view, are not capable of definition.

“39. The NAPF is continuing to research the extent to which its member funds are already taking account of non-financial matters within their investment strategy process. We have some preliminary results of a telephone survey conducted amongst 100 NAPF members. When asked for their reaction if the Government introduced a regulation under which the SIP had to include a statement of the trustees’ investment strategy relating to moral and social issues, 70% of respondents replied that they would take only financial considerations into account, 10% replied that they would take account of moral and social issues, and the remaining 20% were unable to reply. We will publish the full results of the survey when the analysis has been completed.”

8 March 2000

Dear Member

Socially Responsible Investment

As you will be aware, the NAPF felt that the Government was somewhat premature in announcing its intention to compel trustees to amend their Statement of Investment Principles (SIP) to reflect the extent, if any, to which socially responsible considerations are taken into account. We had fewer concerns with the Government’s desire to encourage disclosure on voting practices. So far as SRI is concerned, we felt that the debate should have run a little longer and that trustees should not have been forced to grapple with this particular issue when they and their plan sponsors have so much else on their agenda.

In June 1999, however, Stephen Timms, the then Pensions Minister, while confirming his intention to proceed with the regulations, reassured us that he was interested in increased transparency rather than securing direction of investment via the back door. In this spirit, the NAPF told the Minister that we would play an active part in helping our Members come to terms with their increased responsibilities.

A key component of this strategy was a Fund Members’ seminar that attracted representatives from more then 120 schemes to our new headquarters in Westminster. So that we can provide similar assistance to those Members who were unable to attend our seminar, a detailed summary of the proceedings has been prepared. A copy of that summary is enclosed with this letter. I hope you will find it useful.

Although the regulation takes effect in July, like every other aspect of the SIP, the SRI and voting aspects will need to be kept under review. The NAPF will, in the coming weeks, be turning its attention to other ways in which we can best help trustees meet all the challenges they face in our increasingly complex world.

Yours sincerely,

Alan Pickering