Reforms to local government pension scheme investments could undermine pension funds’ power on ethical investment issues, councils have warned.
The Department for Communities & Local Government this month proposed that LGPS funds should jointly operate common investment vehicles to invest heavily in ‘passive’ funds, which are designed to track the movements of stock markets. Such funds have lower fees than their active counterparts in which managers use a broader range of factors to make investment decisions.
Some local government pension managers fear greater use of passive funds would erode councils’ power to make decisions about investing in controversial stocks such as tobacco firms and arms manufacturers. Such stocks are present in most major indexes because they are some of the world’s most valuable companies.
Pressure has been placed on LGPS funds to disinvest from stocks such as tobacco due to claims that holding such assets contravenes their councils’ public health duties.
At the National Association of Pension Funds local authority conference in Gloucestershire on Tuesday, Devon Pension Fund’s Mark Gaylor questioned how ethical investment would operate within a CIV.
In response, Avon Pension Fund investment manager Liz Woodyard said passive investment would constrain funds’ responsible investment policies.
Ms Woodyard said: “In passives, it is not an option at all [to disinvest from a particular stock]. A drive towards passives means moving more towards indexes and you could be invested in companies with poor governance. You can vote against them, but ultimately you can’t disinvest.”
Instead, Ms Woodyard said funds should challenge their asset managers on how they dealt with controversial corporate behaviour.
She said: “At Avon, we have an agreement that responsible investment is part of our fiduciary duty. Our core belief is that non-financial risks have financial impacts and our managers should build this into their decision making. We delegate the voting and engagement to our investment managers.”
Nial Mills, an investment manager with First State, an investment firm which boasts of strong ethical credentials, said both active and passive investment managers should engage with companies and report back to schemes on their corporate governance activity.
Ms Woodyard said schemes should also collaborate with other funds to access expertise on corporate governance.
“We focus on collaboration because we don’t have the resources to be that active,” she said.
“We do this through the Local Authority Pension Fund Forum. We get examples and expertise, which makes it easier to talk to investment managers about corporate governance issues.”
In a separate session, the head of the Essex Pension Fund Kevin McDonald raised similar concerns over passive investing and councils’ decision-making power.
In response, local government minister Brandon Lewis said: “I am very clear that local accountability is important.”