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Home / UK and Canadian Pension Fund – Drivers

UK and Canadian Pension Fund – Drivers

Comparative Study of U.K. and Canadian Pension Fund Transparency Practices 

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5. Social and Political Drivers Leading to the SEE Issue Disclosure Requirement in Amendments to the U.K. Pensions Act 8

Introduction

This section explores the social, political and other drivers leading to the introduction of the requirement to disclose social, environmental and ethical considerations in all occupational pension fund statements of investment principles. The requirement is from hereon referred to as “the requirement” and is based on the legal explanation of the disclosure requirement in the previous section. The requirement was championed by the new Labour government, which opportunistically used a review of the Pension Fund Act conducted for other reasons. As we shall describe, the disclosure of social, environmental and ethical issues was supported by key NGOs and generally faced little opposition as it was seen as part of a general move toward greater transparency of U.K. pension funds. The following section outlines the key drivers and various stakeholder group positions leading up to the requirement. A table of chronological events is attached in Appendix B.

Key Stakeholders

U.K. Government Tony Blair was elected Prime Minister of the U.K. in 1997, bringing the Labour Party into government after 18 consecutive years of Conservative rule. The new Labour government positioned itself in support of modernizing government and other U.K. institutions, including company law, and elevating the role of corporate responsibility. Momentum quickly built for institutional investors—notably pension funds—to serve as vehicles for promoting CR in the U.K. The U.K. government has been relatively active in promoting the concept of private sector self-regulation for corporate responsibility. 9A number of policy initiatives leading up to the requirement—and under review at the time—created the necessary momentum to pass the requirement (see Appendix B for a more detailed chronology); the requirement was widely advocated within the U.K. government (with cross-party support) but predominantly championed by a few key Labour MPs including John Denham,10 Tony Colman 11 and Stephen Timms. In July 1998, John Denham (then Minister of State at the Department of Social Security) gave the U.K. Social Investment Forum (UKSIF) Annual Lecture to representatives of the investment industry, NGOs and UKSIF members. During the speech, he announced the government’s intention to amend the 1995 Pensions Act to include a statement in the SIP on consideration of SEE issues (Denham, 1998). He stated: “I am minded to take action which will ensure that trustees set out the extent to which their investment strategy takes account of ethical and social considerations…” (Denham, 1998). Also in 1998, an All-Party Parliamentary Group (APPG) on SRI was formed to “promote informed government debate on SRI issues” and “to ensure that those issues are considered, wherever relevant, during framing of legislation” (Insight Investment, 2003). Tony Colman (MP, Putney) was appointed to chair this group 12and has since been central in driving parliamentary action on socially responsible investment. Initially, the requirement was widely misinterpreted and considered to be a move by the government to force pension funds to embrace SRI (Powdrill, see App. A). Therefore, a key activity leading up to introduction of the requirement was the 12-month multi-stakeholder consultation period to raise awareness of what the requirement would include—and, perhaps more importantly, what it would not include (i.e., mandatory inclusion of SEE issues in pension fund investments). The consultation consisted of a number of meetings with the U.K. investment community, NGOs, trustees, trade unions, lawyers, academics, other government departments and other interested parties. Emphasis was given to increasing the transparency of pension funds, the voluntary nature of the requirement (to consider SEE issues), and creating space for trustees to include SEE issues in their investment process (Napier, see App. A; Colman, see App. A). In 1999, Denham was succeeded as Minister of State at the Department of Social Security by Stephen Timms,13 who supported the requirement and introduced the initiative to Parliament that year. Colman and the APPG on SRI tabled Early Day Motion No 710 on Pensions Disclosure Regulation in support of the government’s proposal, garnering cross-party support and the backing of 163 MPs (APPG, 2000). The requirement did not see any opposition in Parliament, as it was supported by the Liberal Democrats and was not opposed by the Conservatives (Colman, see App. A). The lack of political point scoring was quite remarkable (Waygood, see App. A). Moreover, ministerial debate about the requirement helped to demonstrate that it was not an anti-company agenda but rather a move to encourage transparency of pension funds. RI generally fits well with Labour policy. Moreover, in the U.K., many MPs come through the political system via local councils and have experience with the Local Authority Pension Funds (LAPFs). 14They are therefore likely to have greater knowledge and experience related to the challenges surrounding RI or SEE issues and pension funds (Shepherd, see App. A; Webster, see App. A). It seems that the U.K. government genuinely believes that CR benefits all stakeholder groups. The SIP/SEE requirement is often cited (especially by politicians) as an example of public policy successfully promoting CR and creating value on many levels (Waygood, see App. A; Webster see App. A). Much of the commentary we obtained in our research made clear that the U.K. government had played a significant leadership role in promoting the requirement:
It was an idea that appealed to a couple of people in government as a possible area for exploration…and a way to do it that was politically easy was found. (Mansley, see App. A) He [Denham] was in a position to say that “I understand the business case as well as the economic case for doing this kind of a reform.” And that was the key thing—having someone with a significant understanding of SRI in a senior pensions role in government. He had the authority to make an SRI progression happen, and the understanding of how it could ultimately benefit both corporate responsibility specifically and the economy more generally....” (Waygood, see App. A)
As for the question of what the U.K. government was trying to achieve with the requirement:
From the government’s perspective the “why” relates much more to the health of the UK Plc or the UK economy, knowing that companies which deal with their social, ethical and environmental performance tend to be best managed and better performers. (Waygood, see App. A) The idea of information and choice fits with their [the Labour Party’s] “third way” economics: regulating rather than controlling markets and adopting a variety of new approaches to social and environmental issues. There are also a number of MPs who have invested in ethical investments themselves and have been part of these debates in their younger days who seem pleased with what is going on right now. (Webster, see App. A)
Civil Society and Allied Organizations Many NGOs believe capital markets can be used to influence CR in support of their various objectives on SEE issues (Waygood, 2004), and they saw the proposed requirement as an opportunity to further advance their goals. Some NGOs argued that the requirement did not go far enough to support CR and RI and would have preferred to see mandatory consideration of SEE issues in pension fund investments (MacDougall, see App. A; Webster, see App. A). However, recognizing the potential for the requirement to raise awareness on SEE issues, most NGOs in the U.K. very actively supported it. Two of the most prominent NGOs and their role in the requirement are discussed below. U.K. Social Investment Forum The U.K. Social Investment Forum 15(UKSIF) is widely regarded as the key NGO supporting the requirement (Waygood, see App. A; Webster, see App. A; Shepherd, see App. A). UKSIF led the NGO lobby for the requirement and informally collaborated with others including Friends of Earth, War on Want, Traidcraft Exchange and WWF-U.K. We understand that, recognizing the opportunity presented by the broader SIP review and knowing Denham was open to SRI generally, UKSIF suggested the idea of including the requirement directly to Denham (Waygood, see App. A; Wildsmith, see App. A). They also called upon the expertise of their membership to develop a strong case for the requirement (Waygood, 2004). UKSIF became the secretariat for the APPG on SRI upon its creation in 1998, and together they created an enabling environment for the government to push the requirement through (Shepherd, see App. A). 16 Pensions Investment Research Consultants Pensions Investment Research Consultants 17(PIRC) saw the requirement as a key driver in promoting sustainability strategies for corporations and giving pension funds the legal legitimacy to consider SEE issues. They publicly supported the proposed requirement stating:
The government’s initiative [the requirement] means that the socially responsible investment movement has come of age. The regulation recognises that socially responsible investment is an appropriate part of a pension fund’s investment policy and is consistent with the fiduciary responsibility of trustees, a view PIRC has championed for thirteen years. It should finally lay to rest the stale debate over the legality of these strategies. (PIRC, 1999)
Pension Funds A few pension fund organizations are singled out here for having adopted a position on RI and/or the requirement. National Association of Pension Funds The only major opposition to the proposed requirement came from the National Association of Pension Funds (NAPF). 18Initially, NAPF considered it to be bad for pension funds. However, they changed their position: after dialogue with the government (through the consultation process), they came to understand that consideration of SEE issues for investments was to be voluntary and the requirement would further increase pension fund transparency. This understanding improved their comfort level. The NAPF ultimately supported the requirement and, before it was finally implemented, conducted a seminar to educate members on the new public policy (Pryce, see App. A). Local Authority Pension Fund Forum The Local Authority Pension Fund Forum 19(LAPFF) has historically been active in SRI (Shepherd, see App. A) and clearly states in its mission statement that the forum “exists to promote the investment interests of local authority pension funds, and in particular to maximise their influence as shareholders to promote corporate social responsibility and high standards of corporate governance amongst the companies in which they invest, commensurate with statutory regulations” (LAPFF website). The LAPFF was indeed supportive of the requirement and considered it an opportunity to promote its own strategy of shareholder action (LAPFF, 1999). Universities Superannuation Scheme The Universities Superannuation Scheme (USS) 20was already active on SEE issues when the requirement was proposed and to a certain extent was a model for the requirement (The Ethical Investor, 2000; Thamotheram, see App. A). Along with BT, it was one of the first pension funds to start a dialogue on SIP that included consideration of SEE issues, corporate governance and engagement policy in its investment process (The Ethical Investor, 2000); this was due to its active membership of university academics and NGO activism (Ethics for USS), who put pressure on the scheme to divulge how their pensions were being invested and demanded a socially responsible approach to investing. USS SRI policies cover its entire assets and are not restricted to certain allocated funds. It is also one of the very few pension funds to have an in-house team for SRI. USS’ SIP is included in Appendix D as an example of best practice in U.K. pension funds. Fund Managers Generally, the investment management community did not take a position on the requirement. They left the issue with their clients, letting them decide how they wanted to invest their money and, in turn, ask for appropriate services from their managers (Gamble, see App. A; Lankester, see App. A). That said, fund managers that had already incorporated SEE considerations into their investments saw the requirement as an opportunity for increased business. Other investment houses began to take action in order to respond to the anticipated demand for RI-oriented investment strategies (Lankester, see App. A; Robins, see App. A). In addition, a number of new SRI funds were launched in the U.K. in the period leading up to the requirement (Shepherd, see App. A). Trade Unions 21 The involvement of trade unions was limited in the process leading up to the requirement. Overall, trade unions did not have particularly strong views on RI. Indeed, most trade union–appointed trustees were nervous about incorporating SEE issues and confused about how they might conflict with their fiduciary responsibilities. Many believed that SRI was “on the cusp of legality” (Powdrill, see App. A). Government consultation on the requirement catalyzed trade unions into rethinking their policies with respect to pension fund investment strategies and how they might better align with union policy objectives (Powdrill, see App. A). And more recently, the Trades Union Congress (TUC) and some of their affiliated unions, such as the GMB, have initiated activities to educate pension trustees on SRI and shareholder activism. 22

Summary

From the foregoing, we can observe that the passing of the SIP/SEE requirement was an act of political leadership that capitalized on an existing review of the Pensions Act and which seemed to be threat-free to most if not all stakeholders. The voluntary approach carefully avoided opposition from potentially opposed stakeholders and ultimately won the active or tacit support of all relevant groups (insofar as our research could determine). The policy has often been cited in public and private sectors as an example of successful public policy for mutually beneficial outcomes; however, the degree of impact on CR is still under review. The following section examines the ex ante reactions and outcomes stemming from the disclosure requirement.