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IPE special report May 2018

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Legal threat to pensions arms trade decision

UK - Trade union officials have warned Merseyside pension fund could face a legal challenge over a recent decision by local authorities to continue the fund's investment in companies selling armaments.

Councillors from eight boroughs representing employer sponsors to the £4.2bn (€5.8bn) pension fund rejected a proposal - submitted by Liverpool City Council and Knowsley Metropolitan Borough Council - on November 26 to divest pension fund assets from assets linked to the arms trade, on environment and social governance (ESG) grounds.

The vote went against those parties following legal advice from the pension fund suggesting such actions would be against the fiduciary responsibility of the trustees and fund officials.

But as a result of the pension fund committee's decision, a legal team has been created to give guidance to Merseyside and Wirral TUC branches on whether it has a case to challenge the legal premis on which many local authority pension funds believe they cannot legally opt for divestment.

Alec McFadden, president of Merseyside TUC, has even gone so far as to claim the five local authorities who voted to reject the plan were "falsely ‘legally' advised.

"That decision is legally flawed," said McFadden.

"The councillors voted in total ignorance to continue to invest the millions of pounds of Merseyside Pension Fund members in the arms industry. Every councillor at that committee meeting supported the need for ethical investment while still trying to get maximum financial return on investment, regardless of ethics and morality," he added.

More specifically, the legal case the TUC is questioning is the Fiduciary Duty of Trustees case known as Cowan v Scargill 1984, which had been brought to prevent the National Union of Mineworkers (NUM) from suggesting the mineworkers pension scheme assets should not be invested in any other energy provider, among other things.

Judge Megarry ruled at the time trustees should invest regardless of other considerations, however, the TUC is looking at whether this could be challenged as Megarry revisited the case in 1989 and concluded the case did not support the thesis profit maximisation alone was consistent with the fiduciary responsibilities of the trustee.

Moreover, the UN has since reviewed  the same case and concluded in their legal opinion: "…Cowen v Scargill cannot be relied upon to support the single-minded pursuit of profit maximisation, or indeed any general rule governing investment decision-making: it is a narrow case that turns on its own special facts."

Despite deciding against divestment, Merseyside PF did decide at its latest meeting to incorporate the United Nations' Principles for Responsible Investment into the fund's statement of investment principles.

Officials at the pension fund have declined to comment on the legal threat,  but in an official statement,  councillor Ann McLachlan,  chair of the Merseyside Pension Fund Committee, said the pension fund believes engagement is more appropriate than divestment.
 
"In reaching this decision, we have been mindful of the representations made to us by the Fund's members and other groups and stakeholders. Being a signatory to the UN's Principles for Responsible Investment means that ethical, social, and environmental considerations are taken into account when making decisions on how to invest funds. It also provides a structured framework for achieving better, long-term returns on the Fund's investments."
 
She continued: "There are many matters, including the arms trade, which are of concern to people and we believe that rather than divestment, a policy of active engagement with businesses best enables us to address the differing viewpoints and responsibilities involved."

Merseyside is not the only local government pension scheme to face such pressure in recent months, as the Edinburgh-based Lothian pension fund rejected a similar proposal in September to divest from armaments.

Elsewhere in Europe, however, pension funds have begun to look at their investment strategies, and schemes in the Netherlands, such as the giants ABP and PGGM, have been under strong public pressure, following a local documentary, to divest from companies producing cluster bombs and land mines.

The Netherlands government recently stated it would not implement legislative requirements on pension funds to divest from such firms, but schemes in Denmark, such as ATP, PKA and Sampension have reacted to government calls for divestment from companies linked to recent human rights clashes in Burma.

If you have any comments you would like to add to this or any other story, contact Julie Henderson on + 44 (0)20 7261 4602 or email julie.henderson@ipe.com

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