Local authority pension schemes in the UK could face successful demands for members for portfolios to drop tobacco company holdings, according to a legal opinion from a respected barrister.
The Local Government Pension Scheme (LGPS) Shadow Scheme Advisory Board asked Nigel Giffin, a specialist in public law, to establish if the funds owed a fiduciary duty to its members and if wider functions, aims or objectives of the administering authority should impact the discharge of its LGPS investment duties.
The LGPS Shadow Scheme Advisory Board, the pilot body for the new LGPS Advisory Board, was set up to encourage best practice, increase transparency and coordinate technical and standards issues among local government schemes.
Giffin said that the administering authority of an LGPS fund has both fiduciary and public law duties. The fiduciary duties are both to the scheme employers and to the scheme members.
He added that the administering authority’s power of investment needed to be exercised for investment purposes, and not for any wider purposes. Investment decisions must therefore be directed towards achieving a wide variety of suitable investments, and to do what was best for the financial position of the fund, balancing risk and return in the normal way.
“So long as that remains true,” the advice continued, “the precise choice of investment may be influenced by wider social, ethical or environmental considerations, so long as that does not risk material financial detriment to the fund.
“In taking account of any such considerations, the administering authority may not prefer its own particular interests to those of other scheme employers, and should not seek to impose its particular views where those would not be widely shared by scheme employers and members.
“Nor may other scheme employers impose their views upon the administering authority,” he added.
The LGPS Advisory Board said this opinion could also apply to social housing, for example.
It said: “An administering authority may take account of social housing needs but only if an investment in this kind of asset stands up as an investment in its own right and can demonstrate that it is not preferring its own interests over other scheme employers in making the investment.”
Among local authorities, the Newham Pension Fund has already removed tobacco from its portfolio.
Catherine Howarth, chief executive of lobby group ShareAction, said: “This will help members of the LGPS who have ethical objections to investing in tobacco stocks, in proposing that their funds look for alternatives to tobacco that deliver the same long-term investment returns.”
She said ShareAction would be making contact with scheme members’ groups which have been campaigning for the pension funds to disinvest from tobacco.
In particular, she expected the recent influx of health workers into the LGPS following a restructuring of the National Health Service to continue acting as a catalyst for change.
The Local Government Association, which commissioned the opinion on behalf of the shadow board, added that it welcomed the advice. “It makes clear that, while the administering authority’s power of investment must be used to get the best returns, wider social, ethical or environmental considerations can be taken into account – providing any replacement assets achieve similar returns.
“It has confirmed our view that these are decisions best taken locally,” it added. “No one stakeholder group can impose its view on another when it comes to deciding how assets are best invested in individual pension funds.”