Confidence is growing that the need for pension funds to address the issue of socially responsible investing (SRI) will be reflected in the pensions bill.
Specifically this means that defined contribution (DC) schemes should offer an ethical option to their members while defined benefit (DB) `schemes should disclose in their accounts how they are addressing their social investment policies.
Last December the UK Social Investment Forum met with the all-party parliamentary group on socially responsible (APPG or SRI) investing in which executive director Helen Wildsmith presented a number of research findings and policy recommendations.
In respect of DC schemes she pointed out that most “do not offer wide choice of funds, let alone SRI options” but noted that “choice is increasing following Myners’ recommendations.”
The UKSIF’s policy recommendation states that “all DC pension schemes should allow members to invest their own (and their employer’s) contribution in a responsible way.”
It cited NMG Research covering 675 investors which showed that “8 in 10 investors believe that employers should offer an ethical investment option for occupational pension schemes.”
Progress on the political front has been encouraging. "On the basis of the discussions that there have been with civil servants it appears that the requirement for an ethical option for Defined Contribution pension schemes will be included in the pensions bill,” says Tony Colman, chairman of the APPG on SRI.
But while the legislation seems to be headed in the right direction, SRI is not a central feature. Colman explains that it will be addressed “in the advisory documentation that accompanies the bill, rather than on the face of the bill.” He adds: “Now that is obviously disappointing to me, but I am reassured that the bill will have the impact that we would like.”
“I am keen to get as much as possible on the face of the bill so that the trustees can’t wriggle out of it,” he adds.
In the case of DB schemes, SRI disclosure legislation was introduced in July 2000.
However, UKSIF pointed to recent research, which had identified a gap between SRI policies and practice for most UK pension funds.
UKSIF’s policy recommendation states that funds should report engagement/activism to ensure implementation. It adds that this would also help drive implementation of the City’s wider code on activism.
Tony Colman stressed that Malcolm Wicks, pension minister, who is steering the bill through the commons is very much engaged with the SRI issue.
Colman is clear about his aims for the new legislation in this regard. "The advice for defined benefit schemes that accompanies the bill should be strengthened,” he says. “Specifically, rather than providing a minimal statement, defined benefit pension funds must explain in the report and accounts how they are implementing their SIP. This is the way that the legislation seems to be moving.”
So how concerned is he that pension funds will ‘wriggle out’ of their obligations? “Very,” he says. “So far a number of pension funds have let down their members in the quality of their reporting.”
Colman is concerned that the City will view the incorporation of SRI in the pensions legislation as “a Labour government following a Labour agenda.”
He is quick to reassure the sceptics: “The position is clear,” he says; “choice must be available to the consumer; it should not be government driven.”
He stresses that the APPG is not demanding that every single pension fund should be run on a socially, ethically and environmentally friendly basis. “That would be contrary to the basic legislation on which pensions operate in this country,” he says.
Colman is concerned that there is insufficient involvement on the part of many pension funds in ethical business practices. “It worries me that the pensions industry that ultimately votes in the directors decides where they put their money, stay in the company and make sure that it performs to the highest social environmental and ethical standards have not done so.”
He adds: “You have to ask yourself how far the pensions fund industry has gone to ensure that what some of the food processing companies in UK are doing is ethically and environmentally sound.”
On this point Colman criticises the CBI’s view that it’s not for companies to police ethical standards. “We are talking about independently set standards that are available for companies to measure themselves against,” he says. “Most reputable businesses want to set themselves against these standards.”
In terms of support, Colman cites the Institutional Shareholders’ Committee “which has moved forward on the SRI agenda over the past three months”.
“I have also been very impressed with Peter Montagnon at the ABI who has taken a strong line on this issue,” he continues.
He adds that whatever scepticism there might be the reality is that Myners is having the desired effect: “I am told by UKSIF that Myners is having a major influence and ethical choices are now coming through in the new offerings.”
In terms of timing, Colman notes that “Andrew Smith, Secretary of State for Work and Pensions, is very keen to ensure that we are not caught by the general election due in May 2005, so it needs to get through by then.”