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UK Local authority pension funds should give up investing in tobacco, report claims

24 January 2012

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A new report by FairPensions and ASH (Action on Smoking and Health) has challenged the long held view that UK local authority pension funds can hold 'unethical' assets such as tobacco in order to fulfil a legal duty and  maximise investment returns

With tobacco sales declining for the first time in 2010 and savers continuing to express concerns over whether their money is invested 'ethically', the report claims to expose misconceptions surrounding investors' duty to have tobacco as part of their portfolio. 

The report is launched with figures showing that councils across Britain have at least £1.3bn of employee pension funds invested in tobacco.

Both organisations claim that the three most heard arguments in favour of schemes investing in tobacco can no longer be upheld.

One of the most heard arguments; that is a trustee's "legal duty to maximise financial return" and that a trustee "cannot give consideration to ethical issues", is dismissed by the report as being "somewhat simplistic".

"Although local authority pension funds are governed by different laws to other types of pensions, members of their pensions committees have similar fiduciary duties to pension fund trustees," says the report.

"The phrase 'duty to maximise return' does not appear in any UK statute or case law. Pension fund trustees have a fiduciary duty to invest 'in the best interests of members and beneficiaries'. This is based on the common law duty of loyalty, which exists to ensure that trustees avoid conflicts of interest and do not abuse their position to further their own ends. Trustees also have a duty to invest prudently."

The report also claims that the two other common justifications for the investment practice, (that trustees do not interfere with the day-to-day decisions of external investment fund managers and that tobacco is a low risk, high return investment) are no longer valid.

Commenting on the report, Christine Berry, policy officer at FairPensions the organisation campaigning for the ethical investment of UK pension funds, said that it was simply not true that the law requires pension funds to ignore their members' ethical views.

"It's time to move on from this tired old myth: savers who care about where their money is being invested have the right to expect a considered response to their concerns,"  she said.

FairPensions and ASH question whether tobacco is a prudent long-term investment now that global tobacco sales are falling and some analysts even predict that smoking could disappear entirely. They point out that shareholders in tobacco companies should be particularly concerned by the raft of regulations that are set to affect the industry over the next few years.

"So far tobacco companies have pulled off the trick of boosting profits in the face of falling sales and that has kept share prices high. But it can't go on forever, and the problem is not just falling sales," said Martin Dockrell, director of policy and research at ASH. "All around the world the big tobacco companies face a perfect storm of tougher regulation and higher taxes while more governments sue for billions of dollars in health care costs."

Last year Pension Funds Insider revealed in a series of articles how local authority pension schemes throughout the country have invested both in and against tobacco use. On the one hand they have invested in the mechanisms that are needed to help people give up smoking, and at the same time channelled pension fund assets in that very same industry they are fighting against.

Professor Lindsey Davies, President of the Faculty of Public Health, said the contradiction needed to be addressed: "The very organisation that is supposed to be taking the lead in protecting our health could be using public money to invest in tobacco. This is a clear conflict of interest that will undermine councils' credibility and the public's trust in the health services they receive. We would urge all councils to use the many alternative, and more ethical, forms of investment for their pension funds that still maximise financial return."

Research used for the report shows that Camden was the council with the largest proportion of its pension fund invested in tobacco (3.7%). West Yorkshire has the single largest value amount of £125m. Many other local authorities, such as Berkshire, have no direct investment in tobacco but have invested in global tracking funds such as the FTSE 100, of which tobacco companies make up 2%.

The full report can be found here