Pensions update - socially responsible investment

Since the rise in prominence of the "green" movement more and more ethical investment funds have been established. With effect from 3 July this year trustees of UK occupational pension schemes must set out in their statement of investment principles:

• the extent (if at all) to which social, environmental or ethical considerations are taken into account in the selection, retention and realisation of investments; and
• their policy (if any) in relation to the exercise of the rights (including voting rights) attaching to investments.

There have been arguments about whether this new requirement is appropriate. The Association of Pension Lawyers were not originally in favour of the wording in the regulations as they argued that a requirement to state policy on ethical investments did not necessarily give the trustees an entitlement to formulate such policy. It could be argued that current English law suggested that trustees should not be swayed by moral considerations and should act only in the beneficiaries' financial interests.

The main authority dealing with the area is the decision of Sir Robert Megarry in Cowan v Scargill (1984). The union nominated trustees of the National Mineworkers Pension Scheme wanted the investment policy of the scheme changed so that it (a) could not invest further in overseas equities; (b) had to withdraw from existing overseas investments; and (c) would be prohibited from further investment in companies which were in direct competition with coal. Sir Robert Megarry said:

"The starting point is the duty of trustees to exercise their powers in the best interests of the present and future beneficiaries of the trust, holding the scales impartially between different classes of beneficiaries. This duty of the trustees towards their beneficiaries is paramount. They must, of course, obey the law; but subject to that, they must put the interests of their beneficiaries first. When the purpose of the trust is to provide financial benefits for the beneficiaries, as is usually the case, the best interests of the beneficiaries are normally their best financial interests. In the case of a power of investment, as in the present case, the power must be exercised so as to yield the best return for the beneficiaries, judged in relation to the risks of the investments in question; and the prospects of the yield of income and capital appreciation both have to be considered in judging the return from the investment."

So where does this leave us with the new requirement? The UK Government seems to have adopted the reasoning of the Pensions Law Review Committee in 1993 that "Trustees are perfectly entitled to have a policy on ethical investment and to pursue that policy so long as they treat the interests of the beneficiaries as paramount and the investment policy is consistent with the standard of prudence and care required by law". Presumably this means that the projected returns for the ethical investment must not be worse than for comparable non-ethical investments and trustees or their investment managers must bear this in mind.

For further information, please contact Mark Grant at [email protected] or on +44 (0)20 7367 2325.