UK public pension funds should feel a new freedom to divest tobacco firms, following a closely watched interpretation of new laws

A ruling that UK public pension funds can switch out of tobacco stocks on ethical grounds, as long as this does not reduce financial returns for beneficiaries, is likely to bring more selective investment, campaigners say.

In April, Nigel Giffin QC, a leading public law barrister, published his interpretation of new legislation that has transferred responsibility for “promoting” public health from the National Health Service to local government.

As a result of that change, which came into effect in 2013, council pension funds had sought legal advice on whether investing in tobacco companies was at odds with their new remit.

Many local authorities have admitted investing millions of pounds in tobacco companies, mostly Imperial Tobacco and British American Tobacco, while also spending considerable sums on helping people quit smoking. For example, Merton council has about £5m invested in such assets and Croydon £2.1m, according to the health and smoking charity Ash. Somerset, Gloucestershire, Avon and Wiltshire are among others that have declared investment in tobacco.

UK councils administer more than £200bn of employees’ savings. Now they “may choose to take into account the public-health implications of tobacco investment but only if the result of such consideration is the replacement of these investments with assets producing a similar return,” according to Giffin’s interpretation.

Ethical screening

Catherine Howarth, chief executive of ShareAction, welcomes the ruling and says it is likely to support ethical screening but only where members push hard for it and where trustees are inclined to take a sympathetic view on the inherent financial uncertainty of the markets.
In the past almost all pension funds have refused to look into the potential for removing tobacco or any other stock from their portfolios on ethical grounds, citing their fiduciary duties as a legal restriction, she says.

That line – often taken by pension funds, including the largest one in the UK, the University Superannuation Scheme (USS) – is legally incorrect, Howarth argues, something she says is confirmed by Giffin’s published interpretation.

“I predict that [Giffin’s view] will result in tobacco stocks being held by fewer local government pension funds in future.”

Smoking kills an estimated six million people a year worldwide. As awareness of its dangers has grown in the developed world, tobacco companies have begun to target countries with little or no public health education, mainly in Africa and Asia.

These countries also lack the public health system to handle the many illnesses caused by smoking.

Pension fund operations vary around the world. For instance, Danish healthcare sector fund PKA has a system of elected delegates who attend and vote at AGMs and scrutinise the boards on behalf of the membership at large.

A process of engagement has led to a core of unacceptable investments being screened out – at first involving weapons, then later also tobacco.
Tobacco companies declined to reply to Ethical Corporation on how the ruling might affect investment by UK pension funds. It remains to be seen which local authority pension scheme will be the first to make any changes.

The UK’s Local Government Association says: “We welcome this expert advice. It makes clear that, while the administering authority’s power of investment must be used to get the best returns, wider social, ethical or environmental considerations can be taken into account.

“It has confirmed our view that these are decisions best taken locally and that no one stakeholder group should impose its view on another when it comes to deciding how pensions are invested.”

council pension funds  pensions  pensions investment  smoking  tobacco 

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