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.

Any scheme member with an ethical or socially
responsible viewpoint that was at variance with
that of the trustees would be able to challenge
the trustees’ investment policies. Pressure
groups would have a field day.

“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

Chairman

The National Association of Pension Funds Limited

NIOC House, 4 Victoria Street, London SW1H 0NE
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