Poor pension investment decisions reflect bad governance

Scottish local government pension funds can be a force for good, but clearly not under the current governance arrangements.

Yesterday’s Sunday Herald published the result of an investigation by Rob Edwards into the investments made by Scottish local government pension funds. This shows they are supporting more than 100 big corporations blamed for damaging the climate, causing cancer and profiting from conflict.

While it is called the Scottish Local Government Pension Scheme (LGPS), one third of the membership comes from quangos, private and voluntary sector organisations. This means that among the groups backing major climate polluters is the Government's Scottish Environment Protection Agency (Sepa). Among those funding big tobacco are health groups, cancer hospices, schools and universities. Two public pension schemes are putting millions of pounds into an electronics company that makes controls for US military drones accused of illegally killing more than 400 civilians in Pakistan, Yemen and Somalia.

As I was quoted in yesterday’s article, “it is simply absurd to invest huge sums of public and workers’ money in companies whose aims are incompatible with public policy objectives.” And huge sums they are. The combined Scottish LGPS pension funds have assets in excess on £24bn.

The classic defence of these investments was trotted out in yesterday’s article. We have a ‘fiduciary duty’ to get the best return on investment. Actually the ‘fiduciary duty’ is somewhat less than clear in the LGPS. All other pension funds in the UK and in the EU, in line with the IORP Directive, invest in the sole interests of scheme members and resolve any potential conflicts of interest in scheme members’ favour. Is that how the councillors who make these investment decisions at present view their fiduciary duty – or is it to their council?

Some have interpreted the Cowan v Scargill mine workers pension decision to mean that a fiduciary has an unqualified duty to invest funds in the most profitable investment available. That is a narrow interpretation of that exceptional case and drives a short term view of investment that may not be in the long term interest of the beneficiaries. As UK government minister Ed Davey MP put it:

"As a government, we do want to see ESG issues considered in a rounded way in order to encourage responsible investment decisions... Fiduciary duties placed on pension fund trustees can be about more than maximising the bottom line. These duties require pension fund trustees to consider the best interests of the scheme beneficiaries and we want everyone to understand that."
The confusion over fiduciary duty and poor investment decisions is yet another example of the bigger problem with LGPS governance that is supposed to be addressed by the Public Service Pensions Act. However, the governance sections of that Act are also confused, leading to a further round of consultation in England and here in Scotland.

The new pension governance structures should give member representatives greater influence over investment decisions together with better training and awareness for all those involved. They clearly need it!