In November 2015, the government announced it was opening a consultation on potential changes to the way local government pension schemes operate in England and Wales.
This consultation closed in February. You might’ve seen petitions circulating on social media about these proposals, as well as lots of news articles speculating on the possible implications for the divestment movement.
But what do the proposals actually say, and what could the impacts be on our campaign for fossil fuel divestment?
This blog is an attempt to unpick the nerdy details of the government’s proposals and think about what they could mean for our movement.
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What do the proposals say?
There are two different proposals relating to local government pension funds being discussed. The first concerns pension fund investment pooling and the second, investment principles.
Local government pension schemes have been told by the government to come up with proposals to pool (essentially, merge) their funds (of which there are currently nearly 100) into larger pots of money.
Drafts of these were due in February, with final proposals not due until July.
The basic gist of the proposed regulation of investment principles is that schemes should not consider ‘non-financial factors’ in deciding how money is invested. Specifically,
‘Using pensions and procurement policies to pursue boycotts, divestments and sanctions against foreign nations and the UK defence industry are inappropriate.’
The consultation on this closed in February.
What does this mean?
While the consultation on investment principles has so far received more attention, both proposals have potential implications for divestment.
In theory, there is nothing wrong with the proposals to pool pension schemes.
Currently, funds are being charged huge amounts of money in management and advisory fees, so merging into bigger pots would help avoid the worst of this and save money for the funds and their members.
The idea of using these funds to invest more in infrastructure also seems like a great idea – using pension funds to invest in community renewable energy, social housing and other projects would bring huge benefits to scheme members and the wider public.
However, as UNISON notes, there is serious concern that the pooling of funds into bigger pots could threaten fund democracy.
Unless strong measures are put in place to ensure member representation in pooled fund governance, these new pooled funds (or wealth funds, as Osbourne has called them) could become vehicles for investing in government pet projects, rather than in things that fund members want and need.
‘There are clearly no plans to demand that those investing these giant funds must do so in the interests of scheme members.’
Taking away community and member control of member money also threatens funds’ ability to invest in ways that would benefit the local community.
Forcing these new ‘wealth funds’ to invest in infrastructure also poses problems. These changes would signal unprecedented government intervention in these funds, mandating them to invest in the interests of the central government, rather than their members.
‘We have real concerns at the unprecedented powers of intervention being proposed by the government over investment policy of the LGPS funds. Investment policy should be a matter for the scheme members and their decision makers, not for a government to intervene.
“We are not against pension funds investing in infrastructure. However, there has to be a clear policy that investments should be made in the best interests of scheme members.’
Given that the infrastructure projects currently favoured by the central government include fracking, road-building and nuclear power, the idea that this money could be invested for the social good seems further and further away.
So, you can probably see the potential implications of these changes on divestment: unless the current proposals are radically changed to enshrine democratic principles into the management of ‘wealth funds’, what pension funds invest in could become the whim of the central government.
Although the proposals laid out by the government don’t mention fossil fuel divestment and don’t seem to include it, there are a couple of things that make these changes potentially worrying for our campaign.
Firstly, the vague nature of the guidance means that fossil fuel divestment could easily become netted in the legislation in the eyes of local decision-makers. Misinterpretation of advice on things like fiduciary duty already impacts our campaign in this.
Secondly, according to the Guardian who contacted the Department for Communities and Local Government, the government said that “Councils should not be using pensions and procurement policies to pursue their own boycotts and sanctions”, and that environmental policies were included in this.
Again, this leaves the legislation largely down to interpretation; if divestment is financially beneficial, do these changes affect it? It’s unclear.
As ShareAction notes, according to current law, administering authorities may (and, indeed, should) take account of any financial factor which is relevant to the performance of an investment, including environmental factors. They are also allowed to consider ‘non-financial factors’ where they don’t significantly harm the fund and where members support them.
The PLSA (Pensions and Lifetime Savings Association) which represents 1300 pension schemes with assets of around £900bn has seconded this and pushed back against these proposals.
‘There are valid reasons why a pension fund might wish to apply a particular screening or divestment strategy in accordance with the long-term interests and values of their members.’
So, much like the pooling proposals, this legislation also has potentially drastic implications for fund member democracy, control and representation.
It is crucial that pension funds remain able to invest in their members’ self-defined best interests, this can – and should – include measures to divest from fossil fuels.
What can we do?
Although the consultation on the proposals has closed, we can still keep up the pressure for fair, sustainable and democratic pensions.
If you’d like to get more involved in the campaign to fight this legislation, email me at email@example.com.
This information has been drawn together by a coalition of organisations working on divestment, as well as drawing on briefings by UNISON.