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June 8, 2022updated 07 Jul 2022 7:22am

UK public pensions fear curbs on ethical investing

British local government pension schemes are facing a new law that could limit their ability to make investment decisions on ethical grounds, amid rising politicisation globally of how public institutions allocate their capital.

By Vibeka Mair

Emma Douglas, chair of the UK’s Pensions and Lifetime Savings Association, voiced concerns over a new rule last month. (Photo by Malcolm Cochrane Photography)
  • The UK’s Pensions and Lifetime Savings Association is seeking clarity on a new law that could have a chilling effect on ethically focused investing.
  • The rule, criticised for being overly vague, could allow the government to prevent public pension schemes from making investments that run counter to foreign or defence policy.
  • This comes amid rising state involvement, including in the US, in how public institutions manage their money.

Responsible investment is fast becoming a minefield. Debate is at fever pitch over the benefits or otherwise of ESG investing (epitomised by the furore over last month’s now-infamous speech by HSBC’s Stuart Kirk) and around the issue of greenwashing (witness the high-profile police raid on Germany’s DWS last week and its CEO’s subsequent resignation). On top of all that, public pension funds must also now contend with growing state involvement in whether and how they allocate on ethical grounds.

The UK’s Pensions and Lifetime Savings Association (PLSA) is busy fighting its industry’s corner over a new law that could prevent domestic local government pension schemes (LGPSs) investing in assets that run counter to British foreign and defence policy. This was one of the responsible investment priorities highlighted by PLSA chair Emma Douglas on 25 May during her speech at the organisation’s first in-person conference since the onset of the Covid pandemic in early 2020.

The new government power is part of the Public Services Pension and Judicial Offices Act that gained royal assent on 16 March. It came about after British Member of Parliament (MP) Robert Jenrick proposed an amendment on 22 February. The clause allows the government to issue guidance to authorities administering public sector pension schemes that they may not make investment decisions that conflict with the UK’s foreign and defence policy.

“We’ve already said this could make things more difficult for local authority funds as long-term investors and stewards, increase costs, and add a layer of complexity and confusion onto the good guidance on responsible investment and ESG issues that the LGPS [segment] already has,” Douglas said. “We’ve raised these points with government ministers and our voice has already been heard on the floor in the House of Lords.”

And the PLSA’s voice counts, representing as it does some 1,300 pension schemes managing £1.3trn in assets, of which £337bn is in LGPS portfolios.

“Vague and high-level”

Ultimately, government should not set vague, high-level requirements, such as those in the Jenrick amendment, says Nigel Peaple, director of policy and research at the PLSA. “The precise impact of this new requirement on the practical investment decisions of pension funds will only become clear once the relevant government department has issued guidance.”

The PLSA has been in discussion with civil servants to make sure that the new power is clear and objective and allows schemes to invest in the interest of their members, Peaple tells Capital Monitor. Early indications are that the government intends to promote a rational and reasonable approach, he adds.

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The amendment appears to have been motivated by thinking that public pension funds should not be permitted to make ethical investment decisions, such as boycotting Israeli assets because of the country’s treatment of Palestinians.

During a debate on his amendment, Jenrick criticised such moves. He also wrote an article in UK newspaper The Times that week entitled ‘The Place for Debate on Israel is Westminster not Public Sector Pension Funds’.

The clause also goes against a UK Supreme Court decision in 2020 that LGPSs could invest counter to the government’s foreign policy, in a case brought by the Palestine Solidarity Campaign.

The PLSA is not the only organisation challenging the law. Amnesty International, a human rights group, argued in February that “the amendment is so vaguely worded and potentially so broad in application that it is likely to have a chilling effect on public officials who make investment decisions”.

Moreover, it has said the rule limits the ability of public sector pension scheme members to express ethical preferences in the investment of their fund. In addition, Amnesty International said, the rule increases the risk that public sector funds retain certain investments even when doing so may affect the financial performance of the fund.

MP Richard Burdon, chair of the Britain-Palestine All-Party Parliamentary Group, has said in parliament that the rule was “not only anti-democratic but would risk ethical investment decisions and human rights policies around the world”.

Indeed, councillors responsible for the £10bn Merseyside Pension Fund were in February reportedly debating investments in companies active in occupied Palestinian territories after a member queried whether they were compatible with the fund’s responsible investment policy. The fund did not immediately respond to a request for confirmation sent yesterday.

While it ultimately passed, the amendment had faced some opposition in the House of Lords. Baroness Kramer said in the debate during the 22 March passage of the bill that she had a problem when the pensions of local government servants came under the direction of the political interest of a government.

“If the government feels so strongly that the current trustees are behaving inappropriately, they could easily have made an arrangement whereby investment decisions are put to the members,” she said. “They could let [members of pension schemes] decide what they think is ethical from their perspective and how their money should be used.”

Viscount Younger of Leckie, representing the government in the House of Lords, said the amendment would not require LGPS funds to make any immediate decisions regarding their investments after royal assent of the bill. He added that if guidance or directions were issued concerning LGPS funds’ foreign investments, it would be subject to a 12-week consultation.

Geopolitical risks on rise

Such issues are not unique to Britain. And just how politicised – not to mention confusing and contradictory for investors – they can become is clear from developments in the US.

On the one hand, Republican senators such as Marco Rubio want to ban the Federal Retirement Thrift Investment Board (FRTIB), a pension fund with nearly $800bn under management, from investing into Chinese companies on national security grounds – something that President Joe Biden appears increasingly open to. On the other, questions have arisen over whether the FRTIB should be allowed to allocate to ESG-labelled funds, which are reportedly, in the words of Republican senator Chip Roy, a “woke scam”.

Similarly, the Jenrick amendment is not the first time the UK government has intervened in how pension funds invest. When Russia invaded Ukraine in late February, the PLSA was promptly called into high-level meetings with the UK’s Treasury department to ascertain the domestic pension sector’s exposure to Russia and what could be done to stop or reduce it in the light of incoming sanctions.

PLSA quickly surveyed members and found exposure was at a very low level, says Peaple, who attended the meetings on Russia with John Chilman, CEO of Railpen, the £37bn retirement fund for Britain’s UK rail industry, and chair of the PLSA Policy Board. (That said, major pension plans such as the UK’s National Employment Savings Trust and Universities Superannuation Scheme did make high-profile divestments from Russia.)

This is a good example of how the PLSA quietly works with government, Peaple says. “We leant in and we would have done more if we had to.”

Given the increasingly polarised nature of geopolitics these days, it seems likely the PLSA – and organisations like it elsewhere – will have plenty more leaning in to do.

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