UK and Canadian Pension Fund – Drivers
Comparative Study of U.K.
and Canadian Pension Fund Transparency Practices
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.
© 2013