This month's Off the Record looks at the issue of transparency - specifically, should pension funds reveal the details of their investments?

The issue has recently achieved prominence because of revelations in a television documentary that leading pension funds in the Netherlands are wittingly or unwittingly investing in companies that produce cluster bombs.

Although some Dutch pension funds do reveal details of their investments, others do not. Those who do not face increasing political pressure to do so. The socialist European member of parliament Ieke van der Burg, and others, have pressed for the introduction of an annual report showing the exact nature of pension fund investments.

The Dutch Association of Industry-wide Pension Funds (VB), says pension funds should explain to their contributing members which companies their premiums are invested in and why some companies are excluded.

"We work with social capital, money that people rely on for their pensions. So let's administer this money properly and explain what we do with it," says Peter Borgdorff, VB's general secretary.

There is evidence of a lack of transparency in pension fund investment in other European countries. In the UK, research by FairPensions, the campaign for responsible investment, shows that only five of the UK's 20 largest pension schemes disclose their policies on social and environmental responsibility (SRI) and only one in 20 discloses how shareholder votes have been cast on members' behalf.

So should pension funds provide more transparency about their investments?

We wanted your views. Generally, the result is a vote for more disclosure, more transparency. But there are some reservations.

In particular, the manager of a Belgian fund says that the issue is a red herring for pension funds, who would be better employed worrying about the performance rather than the morality of their investment. "I'm disappointed to see this discussion again being ‘castrated' to the level of a morality question, namely whether or not to make socially responsible investment mandatory, whatever the manner it would be in," he comments.

"Pension fund managers are already riding a horse race as far as performance is concerned. Let us not engage in a race over who has the best ‘moral standards'."

Yet there is some support for greater disclosure. A majority (68%) of the managers, administrators and trustees who responded to our survey feel that pension funds should, in general, be more transparent in their investment strategies and should be prepared to disclose more than they currently do about the way that they invest.

67% think that pension funds should make information about the companies they invest in available to pension fund members.

Some pension funds already do disclose this information. Whether or not pension fund members are interested is open to question. The manager of a large Dutch corporate pension scheme says: "We have done so for a number of years and I believe that there are hardly any members who are interested."

There is also a danger of overloading members with information, a Swiss fund manager observes. It would be impracticable to make information available to members about all companies in the investment portfolio, he suggests, because "there would be too many names".


Disclosing to third parties

Opinion is much more evenly divided about whether a pension fund should disclose its holdings in the shares of listed companies to third parties. Only 52% favour this idea. One pension fund manager says that private pension funds, in particular, should not disclose such information.

There is also a lack of consensus about whether pension funds should disclose their investments in unlisted companies, with 56% in favour. Some respondents feel that funds should only disclose investments in unlisted companies to pension fund members.

Two thirds of managers (64%) think that pension funds should disclose each year their top 100 equity investments. The manager of a multinational pension fund says the top 10 is sufficient. Others say the largest holdings, which most pension funds do. One manager says they should provide this information "only if the majority of members so wish."

64% think that pension funds should disclose the annual voting record of the fund and its external investment managers. This may not always be possible, one manager points out. "For funds and funds of funds it could be difficult or impossible."


Reporting on SRI

Most managers (81%) feel that pension funds have a duty to explain to their members how they have incorporated SRI into their investment mandates.

A Dutch fund manager suggests this should not be done in too much detail. "They should explain in general terms, as they would explain examples of investment style, such as growth and‘value."

Definitions are also important The manager at a French pension fund observes that "it is very important to define what responsible investment means to a pension fund, as the term may hide different realities."

Yet others suggest that such exercises are a waste of time and resources. The manager of a Belgian fund remarks: "There are a number of reasons why pension funds should inform more about their investment strategy and actual investments - plan members' information sharing is an area which still lacks and requires a lot of effort - but SRI is not one."

Should pension funds be active investors, using their shareholder power to challenge poor environmental and social behaviour? A majority (60%) think they should, although some funds point out that they already do this indirectly through the shareholder adviser Institutional Shareholder Services (ISS).

However, there is a strong feeling that this activism should be directed at issues like governance rather than SRI. A UK pension fund managers says activism should be directed at shareholder value, rather than environmental or social issues.

Pension funds should be guided by the interests of the fund members, one manager argues.

"Their focus should be on corporate governance, minority shareholders' interest, and long- and short-term profitability. And if the fund estimates it is in the interest of its own members to bring up environmental and social issues with management, all the better."


Assessing engagement

Opinion is divided, with 52% in favour of pension funds that do engage with the companies they invest in (for example, to try to influence or change their behaviour or policies), revealing the results and progress of these efforts. A French pension fund manager says: "Pension funds should communicate on their efforts. Companies are responsible for communicating on their own actions, not the pension funds."

A large percentage (64%) think a pension scheme's annual report and website should include information on SRI. And a substantial majority (80%) feel that pension funds, and their advisers, should look more closely than they currently do at the activities of the companies in which they invest. The manager of a Swedish fund says such closer scrutiny should only be done "to minimise risk or get more return".

But does lack of transparency actually matter, putting funds and assets at risk? There is an argument that a lack of transparency by pension funds over their responsible investment policies ultimately puts pensions at risk, since ethical issues can often turn into financial problems. Yet this argument does not convince most of our respondents. Only a minority (40%) agree that a lack of transparency could eventually put pension money at risk.

"Transparency has little to do with this," the manager of a Swedish fund says. "Lack of insight has an effect on the investment results, but there is little need to be open about it. What should be transparent is investment policy and how the fund deals with risk, not how you are invested in detail."