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Top 100 UK pension funds -
how ethical are they?
Despite the fact pension funds control a large part of the stock market, many people are unaware what is being
done with the money they invest for their personal security and for that of their family. Unless they have
specifically chosen to invest in an ethical pension fund, it is very likely that their money is being invested in
companies that behave in an ethically, environmentally or socially unsound manner.
Before July 3rd 2001, pension fund members had no right to be informed about their pension fund's ethical,
social and environmental stance. However as a result of growing public demand for more socially responsible
investment, as well as pressure from NGOs, the Pensions Act was finally amended.
On the 3rd July 2000, a new amendment to the Pension Act 1995 came into force requiring the Trustees of
occupational pension schemes to disclose through their Statement of Investment Principles (SIPs) “the extent
(if at all) to which social, environmental or ethical considerations are taken into account in the selection,
retention and realisation of investments”.
This is why we have surveyed the largest 100 occupational pension funds and graded them not only on the basis
of the ethical considerations contained in their SIPs but also on any evidence of mechanisms for ensuring that
trustees and fund managers actually carry out these responsibilities.
Fund managers were contacted by Friends of the Earth in a letter after the amendment came into force on
July 3rd 2000. We asked the fund administrators to send their SIPs and any relevant supporting information
on their SRI policy. The Funds that did not reply to this first request were subsequently contacted by phone.
A reminder letter was then sent in December 2000 to those who had not responded to the first requests. The
Funds that did not reply to any of the written requests were again contacted by phone. Sixty-eight pension
fund trustees responded in some form to our requests, 13 funds explicitly refused to send their SIPs to us,
and 19 did not reply at all.
We are aware that the National Association of Pension Funds wrote to all their members requesting that
they didn't respond to the Friends of the Earth survey which may have affected the response rate.
Disclaimer
We are aware that SRI is in continuous development and we expect that some of the funds
might have updated their policies since this survey has been conducted. However, our
analysis was based on the inforation provided by the Pension Funds at the time
In addition, as mentioned above, we specifically requested that any further information on
the funds' SRI policy be sent to us. Only three funds provided additional documents.
Bench marking
The process of analysing and bench marking the SIPs received was a difficult one. This was due to the
variety of the information received, which varied from a couple of sentences to a full Statement of
Investment Principles and additional documents to complement the SIPs. The vagueness of many
statements added to the complexity of the bench marking process.
The analysis was finally carried out on three main issues:
1) The statement of investment principles: the extent to which ESE considerations are taken into account
in the selection realisation and retention of investments;
2) Engagement: any undertaken by the trustee or the fund manager including policies on the exercise of the
rights attaching to investment (including voting rights); and
Bench marking was then conducted for each issue on the basis of the following framework of comparison:
Policy on the extent (if at all) to which ESE considerations are taken into account
(this category scores out of ten):
The trustee does not have any policy on the extent to which social, environmental and ethical considerations
are taken into account in the selection, retention and realisation of investments (score = 0).
The trustees either do not take position on ESE factors or believe that ESE considerations might have a
negative financial impact on investments, and wish to guard against material negative financial effects of
taking ESE considerations into account. If a trustee delegates responsibility to fund managers on SRI with
no guidelines (score = 1).
If a trustee delegates responsibility to fund managers after having reviewed and accepted the managers'
policy on ESE issues or if the trustee provides only very vague guidelines to managers (score = 2).
The trustees require that the fund managers take account of the financial implications of ESE considerations.
In this kind of SRI statement the Trustees imply that social, environmental and ethical performance are
associated with good financial impacts on long term investment. (score = 4).
The trustees recognise that the interests of their shareholders are more complex than mere financial ones and
that taking ESE into consideration is in the interest also of stakeholders (score = 7).
Trustees' engagement policy;the policy (if any) on the exercise of the rights
attaching to investment (including voting rights) on ESE considerations and/or
corporate governance (this category scores out of three):
The trustee delegates to manager the exercise of the rights attaching to investments including voting rights
with no guidelines. No engagement is mentioned (score = 0).
The trustee delegates to the fund managers responsibility to engage with investee companies on ESE
considerations or just on corporate governance or the trustee promotes negative screening of companies
(score = 1).
The trustee directs fund manager to engage directly with companies (individually or collectively) or
provides specific guidelines to fund managers on positive engagement. (score = 3).
Monitoring Mechanisms (this category scores out of two)
The trustee does not direct the manager to report specifically on ESE considerations (score = 0).
. The trustee directs the manager to report specifically on ESE considerations. (score = 2).
Each SIP was analysed on the basis of the numerical values assigned to the above criteria. The values were
then summed. The final result therefore combined the stated policy on SRI with the available information
on engagement and monitoring mechanisms in place. A poor disclosure policy would also negatively affect
the results. This led to all funds receiving a score out of fifteen. On the basis of these scores, pension funds
were then divided into four main groups:
Results of survey
Group 1. (Scores 9-12)
Criteria: The trustee considers SRI to be in the best interest of the scheme's beneficiaries and of
stakeholders.
The trustee directs fund manager to engage directly with companies (individually or collectively) or
provides specific guidelines to the manager on positive engagement in order to enhance investment value
and improve business behaviour generally.
Monitoring mechanisms are in place and refer specifically to ESE policy.
There were ten pension funds which fell into the top category. While all these schemes present a good
record in the three criteria analysed, the degree by which such criteria are satisfied can vary considerably. In
general, the SIPs of local authorities in the group show a more pro active attitude towards including ESE
considerations into their investment decision process than individual companies. They also support
collective action as the best policy to achieve the greatest possible impact on corporate behaviour
For example the Nottinghamshire County Council Fund considers that SRI approaches are whole fund
issues, applying to all investments, and supports best corporate governance as being in the best interest of
beneficiaries as well as other stakeholders. It has engaged an institutional fund manager to evaluate
alternative techniques of engagement to improve companies environmental performance and will increase
funds to SRI if the evaluation is successful.
Another fund, the West Midlands Pension Fund has developed a best practice approach that in particular
areas exceeds that of the Combined Code of the Committee of Corporate Governance. It also states specific
guidelines for investee companies that include commitments to environmental excellence, the production of
an environmental policy that is effectively monitored and regular reports to shareholders on progress being
made toward improving environmental performance.
The East Riding of Yorkshire Fund had established it own SRI sub committee to monitor ESE issues while
employing Pensions & Investments Research Consultants (PIRC) to undertake research on SRI. It actively
encouraged best practice and where possible sought to work in alliances to maximise its impact.
One of the more explicit statements in support of SRI was that of the University Superannuation Scheme
(USS) which has also developed its own research capacity 'in house':
“It follows that in so far as the USS is actively managed......., the managers take into account ethical, social
and environmental considerations when making their assessments of the merits of a given company, on the
basis that they have, or could have, an impact on its financial value”
The British Telecom Fund specifically extended the responsibility of the company to its suppliers as well as
employees and customers. In its SIP it considers it in the long term interests of the company
“...to manage effectively relationships with its employees, suppliers and customers, to behave ethically and
have regard for environment and society as a whole”
The BBC Pension Fund had established specific policies for both socially responsible investment and
corporate governance. The SRI policy actively discourages socially irresponsible behaviour and asks
investment mangers “...to be vigilant against the effects on a companies' long term performance prospects
which could arise from any practices that alienate civilised society”. While the corporate governance policy
requires fund managers to produce quarterly reports to ensure compliance with the existing policy as well as
identifying cases where relevant Codes of Conduct have been breached and to discussion of any contentious
issues.
Group 2. (Scores 5-8)
Criteria: The trustees associate good ESE performance with potentially good financial impacts on long
term investment (in general related to reputational risk) and therefore require fund managers to take
account of the financial implications of ESE considerations in so far as they can enhance investment
financial performance.
Active engagement is generally encouraged and some guidelines are provided on the exercise of the rights
attaching to investments.
Reporting mechanisms are in general not requested on a regular basis or not specifically on ESE issues.
The second group includes those funds that recognise that ESE considerations are among the factors that can
affect investment financial returns and require mangers to give consideration to these factors as a means to
enhance investment returns. The engagement policy of the Funds in this group can vary greatly and goes
from negative screening (Post Office) to an active collective engagement (Lancashire County Council) with
the companies in which the fund has invested.
However, it is the link between the financial performance and SRI that characterises the funds in this group.
CGNU, for example, requires fund managers to take account of the financial implications of ESE
considerations insofar as they can enhance investment financial performance:
“The Trustee recognises that ESE considerations are among the factors that can affect investment financial
returns. It has asked the manger to give due consideration to these factors in particular in business
sustainability and reputational risk”
Some funds such as the Environment Agency have set up their own ethical investment portfolios managed
by SRI institutions. The Environment Agency Fund focusses on “...investment in sectors with lower
environmental impact” and when investing in higher environmental impact sectors favours companies that
“..demonstrate commitment to addressing sustainable development issues”.
Group 3. (Scores 1-4)
Criteria: Trustees do not take responsibility on ESE issues or by saying that their legal duty is to maximise
the financial benefit of the members of the scheme, they dismiss ESE considerations as having potentially
negative financial impact on investments. Decisions on the extent (if any) to which ESE consideration
should be taken into account are fully delegated to the fund manager with no (or extremely vague)
guidelines. No engagement policy and/or monitoring mechanisms on ESE issues.
Thirty-two pension funds, that is around half of the SIPs received, fell into the last category. Here again
there are differences in the degree by which ESE considerations impact investment decisions. In general
terms, the funds in this group either fully delegate responsibility to their pension managers with no or vague
guidelines or have a poor engagement or monitoring policy.
The Guardian Royal Exchange Insurance Fund's wording on SRI is an example of full delegation of
responsibility to the investment managers without even reviewing the mangers' policy on the issue:
“The Trustees's policy is that the extent to which social, environmental and ethical considerations are
taken into account in these decisions [in the selection, retention, and realisation of investments] is left to the
discretion of the active investment managers”.
One of the most meaningless statements on SRI was from Unilever who instructed fund managers to take
into account social, environment and ethical considerations “...to the extent that they are relevant to future
investment prospects”.
Another aspect of some SIPs in this group is the strong emphasis put on financial aspects over relevant
social, environmental and ethical issues as typified by Associated British Foods
“The Trustees consider that they should in all circumstances act in the best financial interests of the
beneficiaries. The trustees policy is to ask the Investment Managers that, where the primary consideration is
not prejudiced, they should, as appropriate, take account of what they believe to be relevant social,
environmental and ethical issues”.
Group 4. (Score 0)
Criteria: The trustees explicitly or implicitly declare not to have a policy on ESE considerations.
Nine pension funds either clearly stated or their statement could be easily interpreted as declaring that ESE
considerations would not be taken into account. A clear example is the extract sent to us by Invensys
Pensions Fund that states:
“The Trustee does not currently have an explicit policy in place with regard to the extent to which ESE
considerations area taken into account in the selection, retention and realisation of investments. The
Trustee does not currently have an explicit policy in relation to the exercise of the rights (including voting
rights) attaching to investments”.
Key findings of survey
Most occupational pension funds contained SIPs that included SRI in some form. Of the 68 SIPS recieved
59 or nearly 90 per cent of those returned made reference to ethics or corporate socially responsibility in
their investment principles. This is certainly an encouraging response to the recent regulatory developments
for pensions and to a growing public demand for socially responsible investment.
While most funds included SRI in their investment principles, many had few or no demonstratable
accountability mechanisms for trustees to ensure that the fund managers were taking SRI considerations into
account when making investment decisions. In particular there appeared to be virtually no independent
stakeholder verification of any claims made.
Most funds fell into the lower category in our survey because their statements on SRI were either vague or
ambiguous, and responsibility for delivering SRI objectives were passed down to fund managers typically
with no guidance or monitoring mechanisms.
Other funds have used some of their contributions to set up ethical investment portfolios to minimise the
perceived risk to the rest of the fund. Alternatively, members of some funds were offered the chance to
contribute additional payments voluntarily to separate ethical funds.
Statement of Investment Principles
Of those funds supporting SRI, most stated ethical, social and environmental matters should be considered
in their SIP's and a significant majority also made reference to corporate governance.
The SIPs in the top category of our survey (Group 1) show an active commitment in developing a SRI
policy. The SIPs in Group 1, and among these particularly the ones from local authorities, recognise the
importance of including ESE considerations in the investment process not only for the benefit of their
members but also for society at large.
A number of funds made reference to appropriate codes of practice such as the Combined Code of the
Committee on Corporate Governance and encouraged companies to adopt to a best practice approach on
SRI and corporate governance. A few made specific reference to the need to consider political as well as
reputational and business risks. At least one fund also made specific reference of the need to consider the
companies relationship with its suppliers as well as customers and employees.
There were also strong statements in the second group in support of SRI and corporate governance, including best practice.
In many cases, from the evidence provided, the trustees have committed to developing a policy on SRI.
Typically they pass responsibility fully onto the fund manager, usually without giving any guidelines on
how ESE considerations should be taken into account in the selection, retention and realisation of
investment.
These statements show a very low interest in incorporating ESE considerations into the investment process.
The standardised wording of most of the paragraphs on SRI sent to us is also a sign of how little
consideration is given to SRI and how most of the statements aim simply at complying with the new
legislation with the least commitment possible.
Engagement
The second criteria in our survey related to whether the fund engaged in any way with the companies in
which it invested to improve companies' ethical, social and environmental behaviour.
Of those 68 pension funds that responded to our survey around half had some sort of engagement policy (ie.
corporate governance policy) and associated monitoring mechanisms, such as voting rights, to influence
corporations to take account of ESE issues. All of the top group and nearly all the second group had some
sort of engagement policy while less than a third of group three had one.
Some funds developed their own policies for engagement that went beyond corporate governance to include
ESE issues. However most funds direct their managers or delegated bodies to limit their engagement to
corporate governance issues on which they do not go beyond the guidelines of the Combined Code of the
Committee on Corporate Governance.
The exercise of the rights attaching to investment such as voting rights was usually delegated to the fund
managers. These were sometimes attached with guidelines (ie. corporate governance policy) but often were
not. All funds in the top group and around half the second group made reference to guidelines on voting
although these were not necessarily disclosed.
There is a clear lack of transparency when it comes to the disclosure of voting in relation to investments.
Most funds do not disclose voting guidelines to members and no funds disclosed to members or the wider
public how they vote at AGM's. Keeping this information behind closed doors does little to install
confidence in the effectiveness of SRI funds to make a difference.
While some forms of direct relationships did exist between pension fund trustees and companies, it is
interesting to note that only a couple of statements said they intended to reflect members concerns and
actually put in place a consultation process. These were all Local Authority SIPs. This omission on the part
of the majority of the funds analysed is very clear evidence of a gap between the trustees' policy and the
concerns of the funds' members and, even more so, of society at large.
Monitoring
The third criteria in the survey related to how companies are monitored and in particular how ethical, social
and environmental issues of concern are reported back to trustees.
This was by far the worst scoring category with less than a third of the 68 funds surveyed able to demonstrate how they were monitoring and reporting back on ESE issues. Most of the top group and around
half the second group were monitoring ESE considerations hardly any of group three were.
From our analysis, it is clear that most statements lack realistic provisions for monitoring mechanisms to
ensure that ESE considerations were actually taken into account by managers. For instance some funds
delegated responsibility to external organisations to monitor company performance but then had not
demonstrated how this was reported back to Trustees or a relevant governance body (eg. pension sub
committee on SRI). This shows that incorporating SRI into the investment process is still at its early stages.
In particular there was little evidence of 'independently verified' stakeholder reporting to demonstrate that
companies were being held accountable for and responding to their own environmental, social and ethical
impacts. This is critical to ensure that SRI funds do not become victims of 'green washing' their own
members as to their real impact on influencing corporate behaviour.
The lack of transparency within pension funds in relation to how they monitor how companies take into
account ESE considerations is not helpful in demonstrating to fund members and the wider public that
ethically based pension funds can make a difference or are indeed fulfilling their objectives to fund
members.
It is clear that pension funds will have to significantly increase resources in the area of monitoring and
reporting back to trustees and ultimately to members to ensure the effective implementation of the SRI
objectives within pension SIP's.
Local authorities vs company funds
Local authorities show a more pro active attitude towards including ESE considerations into their
investment decision process. They support collective action as the best policy to achieve the greatest
possible impact on corporate behaviour through participating in the policy set by the Local Authorities
Pension Funds Forum (LAPFF) and Pensions & Investment Research Consultants (PIRC). This maybe
partly due to the fact that local authorities are democratically accountable and so tend to be more responsive
to the concerns of both their members and the local community.
Legal duty vs public duty
The development of SRI pension funds has been hampered by legal debate. Most SIPs refer to the trustees'
legal duty to act in the financial interest of their members, in general to justify the lack of a serious SRI.
However, it has been argued that trustees are not required by law to act exclusively in the financial interests
of the beneficiaries but only normally.
Furthermore ethical investment has expanded beyond negative screening to more sophisticated methods of
influence such as 'active engagement' and 'best of sector' approaches along with more accountability
mechanisms required for SRI. This undermines the legal argument against SRI based on the traditional
'negative screening' approach in which significant industrial sectors may have been excluded which in turn
may have had a detrimental financial impact on returns. However, spreading the risk across a range of
companies with a comprehensive engagement strategy reduces the likelihood of poorer financial returns.
With industry surveys consistently showing that around three quarters of UK pension holders would like
their pensions to be used to influence socially responsible corporate behaviour the important message for
trustees and fund managers is not should we be developing SRI within our pension funds but how can we do
it better.
i) Better implementation mechanisms
To ensure the SRI objectives of the SIP are being meet including regular reporting back from fund managers
& members (see below) and the use of appropriate sanctions (ie changes to AGM voting policy, shareholder
resolutions, disengagement) where these objectives are not being meet.
ii) More explicit policies on engagement
To involve investee companies, fund members (see below) and affected stakeholders. This would include
the use of appropriate guidance to companies for reporting on SRI issues along with agreed targets and
appropriate sanctions. For example some major UK institutional investors now have a graded level of
action depending on the adequacy of the response from direct engagement to voting against the company at
their AGM.
iii) Better disclosure of trustees' policies & investments in relation to SRI
This could include publishing policies on major SRI issues as well as their current shareholdings. For
example some funds have posted their SIP, position on key SRI issues and major shareholdings on their
web sites. The funds should also disclose their voting position (including on resolutions) for AGM's,
particularly around the areas of corporate governance and major SRI issues.
iv) Allocate more resources
Funds should substantially increase resources to be able to research, engage, monitor and report back SRI
issues. Smaller funds will need to act collectively or out source these services to dedicated SRI research and
governance organisations.
V) Establish an ongoing consultation with the funds' beneficiaries
There needs to be an appropriate forum established for members to discuss their concerns and to ensure its
reported back to trustees or appropriate governing bodies. This could include the members own web site for
feedback, regular 'externally run' fund member forums and ongoing surveys around key and emerging
issues.
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| Group | Score | Pension Fund |
|
Group 1 Good statement on SRI. Direct engagement. Monitoring mechanisms in place. (Total Scores 9-12) |
12 | East Riding of Yorkshire |
| 12 | University Superannuation Scheme Ltd. | |
| 12 | Merseyside Pension Fund | |
| 12 | Nottinghamshire County Council | |
| 12 | British Broadcasting Corporation | |
| 10 | West Midland Metropolitan Authorities | |
| 10 |
|
|
| 10 | British Telecommunications plc | |
| 9 | Environment Agency | |
| 9 | South Tyneside Metropolitan District Council | |
|
SRI associated with potentially good financial performance. Active engagement encouraged with some guidelines. Monitoring mechanisms either rare or not included. (Total scores 5-8) |
7 | Derbyshire County Council |
| 7 | The BOC group | |
| 7 | City of Edinburgh Council | |
| 7 | Strathclyde City Council | |
| 7 | Hampshire County Council | |
| 7 | BNFL Magnox Generation | |
| 7 | Leicestershire County Council | |
| 7 | West Yorkshire Pension Fund | |
| 7 | AstraZeneca | |
| 6 | CGNU | |
| 5 | Prudential plc | |
| 5 | BP | |
| 5 | Post Office | |
| 5 | Bath and North East Somerset Council | |
| 5 | London Pensions Fund Authority | |
| 5 | London Regional Transport | |
| 5 | Nestle' UK Ltd. | |
|
|
ICI Speciality Chemicals | |
|
Poor statement on SRI, Trustees do not take responsibility on taking ethical, social and environmental issues(ESE) into consideration. No engagement policy and/or monitoring mechanisms for ESE issues. (Total scores 1-4) |
4 | The Co-operative Wholesale Society Ltd. |
| 4 | Greater Manchester Pension Fund | |
| 3 | NatWest | |
| 3 | Vauxhall & Associated Companies | |
| 3 | Centrica | |
| 3 | CMT Pension Trustees Services | |
| 2 | Lloyds TSB | |
| 2 | United Utilities | |
| 2 | National Power | |
| 2 | South Yorkshire Pension Fund | |
| 2 | Guardian Royal Exchange Assurance Ltd. | |
| 2 | Shell Contributory Pension | |
| 2 | CMT Pension Trustee Services Ltd | |
| 2 | Merchant Navy Officers Pension Fund | |
| 2 | BICC Group (Balfour Beatty) | |
| 2 | Railways Pension Fund | |
| 1 | Staffordshire County Council | |
| 1 | Essex County Council | |
| 1 | Phillips | |
| 1 | Carnaud Metal Box Group | |
| 1 | Cable and Wireless plc | |
| 1 | Marconi | |
| 1 | Unilever | |
| 1 | The National Grid Group | |
| 1 | Hertfordshire County Council | |
| 1 | Scottish & Newcastle Pension Scheme | |
| 1 | Scottish Power | |
| 1 | Boots | |
| 1 | Nortel Networks | |
| 1 | Associated British Foods | |
| 1 | The Royal Bank of Scotland Group | |
| 1 | Tesco | |
| 1 | The Pension Trust | |
|
Group 4 (Total score 0) |
0 | Invesys Pension Scheme |
| 0 | Marks & Spencer plc | |
| 0 | The Rover Group Ltd. | |
| 0 | Pilkington plc | |
|
Refused or did
not send
|
n/a | Abbey National |
| n/a | British Steel Ltd. | |
| n/a | BG | |
| n/a | Mars | |
| n/a | Kavaerner | |
| n/a | Allied Domecq | |
| n/a | BAe Systems | |
| n/a | Barclays Bank | |
| n/a | Bass | |
| n/a | Cheshire County Council | |
| n/a | Diageo | |
| n/a | Esso UK | |
| n/a | Exel | |
| n/a | Ford Motor Co | |
| n/a | GKN | |
| n/a | Glaxo Wellcome | |
| n/a | Halifax Group | |
| n/a | IBM UK Ltd | |
| n/a | Interbrew UK | |
| n/a | International Computers Ltd | |
| n/a | J. Sainsbury plc | |
| n/a | NEC (UK) Ltd. | |
| n/a | Pearl Assurance | |
| n/a | PowerGen UK | |
| n/a | Ranks Hovis McDougall Ltd | |
| n/a | Reed Elsevier (UK) Ltd. | |
| n/a | Rolls-Royce | |
| n/a | Royal & SunAlliance Insurance Group | |
| n/a | Royal Insurance | |
| n/a | The Co-operative Insurance Society Ltd. | |
| n/a | T & N Ltd | |
| n/a | Bank of Scotland | |
| n/a | Zurich Financial Services (UKISA) Ltd Group Services | |
| n/a | Scottish Office Pension Agency | |
| n/a | TI Group | |
|
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