Local Government Pension Funds may take into consideration the public health implications of tobacco investment, as long as the replacement assets are able to deliver the same financial returns.

Nigel Giffin QC produced this advice after the LGPS Shadow Scheme Advisory Board requested his opinion on whether an LGPS administering authority owes a fiduciary duty and to whom if that was the case.

The board also sought advice on how should the wider function, aims or objective of the administering authority influence the discharge of its LGPS investment duties.

In his advice, Giffin said: "The administering authority's power of investment must 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 what is best for the financial position of the fund (balancing risk and return in the normal way)."

He added: "However, so long as that remain true, 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 consideration, 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."

Concerns were raised that local authority pension funds are investing in tobacco companies even though they are now responsible for 'promoting' public health.

UK-based NGO ShareAction CEO Catherine Howarth said: "The legal opinion from Giffin endorses the ethical tie-break principle. According to this principle, so long as a pension fund can show there is no financial disadvantage, the fund is free to divest from tobacco".

"This opens the way for scheme members in local authority funds, to whom fiduciary duties are owed, to propose that their funds look for alternatives to tobacco that deliver the same long-term investment returns.

"I predict that certain health workers, who recently joined the Local Government Pension Funds, will formally request this process be undertaken. I further predict it will result in tobacco being held by fewer of the Local Government Pension Funds in future."

First published 10.04.2014

monique_simpson@wilmington.co.uk