Local government pension schemes in the UK have been heralded in the past as being good examples of Socially Responsible Investors. Yet many are making 'unethical' investments in tobacco firms. Pension Funds Insider reports on the widespread practice by local government schemes, which are under pressure to maximise returns

A Freedom of Information (FOI) request, recently submitted by an unnamed health worker located in the south-west of the UK, revealed that the combined tobacco investments of seven local authorities in the area totalled £103.8m.

The results of the request showed that Cornwall has the most holdings of the seven schemes which received the request. The fund invested in no less than six different tobacco manufactures raising concerns that the scheme was not a 'responsible investor'. The total estimated holdings amounted to more than £24.5m.

Devon county council also has a large holding in the industry (£20.8m) followed by Gloucestershire with £16.8m, and Dorset which has a £14.7m holding.

The councils invest in the Altria Group, British American Tobacco, Imperial Tobacco, Japan Tobacco, Philip Morris and Reynolds American.

However, it is not just these local schemes that invest in what has been called by some as an industry of "traders in death".

Local pension schemes have made the headlines due to investing in tobacco firms many times over the past couple of years. Only last year both Lambeth council and Hampshire councils were exposed as investing pension funds in tobacco while in the meantime aiming to reduce smoking amongst its residents. Similar cases were also reported in Wandsworth council and Croydon council in 2009. Of these councils only Lambeth, earlier this year, decided that they would cease investing in tobacco companies.

When Pension Funds Insider investigated the current picture, it found that Hampshire council still invests 1% of its £3.6bn pension scheme holdings in tobacco-producing firms.

Wandsworth council refused to disclose how much it was currently still investing in the industry but did not deny that it did. A spokesperson suggested that a Freedom of Information request should be submitted – a costly solution for answering a simple question which is clearly in the public interest.

Croydon says it has no policy against investing in tobacco because it says it is not acceptable for local authorities to do so. "Our trustees have am obligation to get the highest returns on our investments so we can not exclude anything that is profitable," a manager said. They could however not disclose a figure on the investment because all their equities are invested through pooled funds.

In general pension managers have defended their decisions by saying they are under pressure to "produce the best financial return for the scheme", with some adding that they did not think investing in tobacco was wrong.

Brent council, in its Socially Responsible Investment report which was published November 2010, said: "Investment in tobacco industries has been highly successful over the years. At present, the fund invests in two UK tobacco companies – the value of the investment is around £2.5m." It stated there were "no ethical constraints" with regards to tobacco investments. Pension Funds Insider spoke to the scheme which reported that investments were brought back to £2m currently, but that this was solely the result of an overall reduction in the asset class.

One scheme, the Highland council pension fund, reviewed its situation in 2009 after initial reactions to the investments but decided that it was in the best interest of the scheme to continue. "It was advised that over the last seven years a tobacco restriction would have cost the pension fund more than 10bps per annum in absolute performance," a report said. An employee for the scheme confirmed to Pension Funds Insider that the scheme currently still invests in tobacco.

In Devon, now one of the councils at the heart of the debate, the issue had already been raised earlier last year. County council leader at the time, John Hart, said that the scheme "cannot deliberately limit the ability to obtain the best investment returns by negatively screening out specific investment sectors". He added that long-term performance returns indicated that the tobacco sector had outperformed the market as a whole.

As part of his initial request, which was submitted last month and to which answers have now been provided, the health worker also asked the councils for clarity on their investment policy with regards to the tobacco industry. The answers to this part of the request have not yet been fully provided by all councils.

The full request asked for:

- What investments the county pension funds hold in tobacco companies.
- A separate spreadsheet with the numbers of shares and bonds held in each company and their most recent valuation.
- When the pension fund committee would next consider its investment policy with regards to tobacco companies.

The request to Cornwall, which has been seen by Pension Funds Insider, was clear in its reasons as to why the information was in the public interest.

"As the council is due soon to take over responsibility for public health from the NHS, the committee ought to consider whether the council can ethically and honourably discharge that responsibility when it holds investments in tobacco companies that kill hundreds of Cornwall people each year," the request read.

In last Sunday's Observer newspaper, NHS professionals condemned the investment strategies of the schemes. Dr Gabriel Scally, the NHS regional director of public health for the south-west told the paper he was "shocked" by the size and extent pension invest in the tobacco industry. He said that as a doctor he thought that "it would be completely unethical to have any part in it".

First published 20.07.2011

azeevalkink@wilmington.co.uk