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Ethics and the council pensions

SCOTLAND'S local government workers all hope that their pension scheme will bring in "healthy returns".

How will they feel about the report in The Herald today revealing that they are unwittingly investing more than £220m in tobacco firms?

In 2006 Scotland's Labour and LibDem Government set a bold UK precedent by banning smoking in public places. Local authorities play an integral role in reducing smoking-related harm through public health campaigns that help smokers quit and encourage young people not to risk their health by taking it up. But while local authorities are campaigning to reduce the number of smokers, tobacco companies (despite all their PR talk about market share) have a duty to their shareholders to encourage more people to take up the habit.

Individual public sector workers can decide how to invest their savings, avoiding companies or sectors they consider immoral or distasteful. And yet their biggest investments – their pensions – are made with little consultation. Even councils with no direct investments in tobacco are likely to have money in global tracking funds such as the FTSE100, in which tobacco companies hold 2%.

It is time councils decided not to invest pension money in businesses that contradict their public health strategies.

The traditional defence for local authority pension funds holding unethical assets is that ultimately any deficit between the assets of a fund and its liabilities would have to be met by council taxpayers and they have a legal duty to maximise returns. This is somewhat simplistic, as that phrase appears nowhere in UK statute or case law. Though trustees have a fiduciary duty to invest in the best interest of members and beneficiaries under common law, that is intended to guarantee trustees do not abuse their positions. They are also obliged to invest "prudently". Interestingly, two Scottish local authorities do not consider it necessary to invest in tobacco firms.

Another excuse for inertia in this area is that trustees should not intervene in the day-to-day decisions of pension fund managers, but that is not the same as saying trustees can ignore members' ethical views. In fact, Scottish local authority pension schemes are specifically required to take ethical considerations into account. Thirdly, holdings in tobacco firms are defended on the basis that they are low-risk, high-return investments. For how long? Tougher regulation, higher taxes, public health campaigns and threatened law suits are all giving the sector an uncertain future. Meanwhile, some ethical funds are outperforming the market.

The debate about investments in defence contractors is more complicated. While many pension fund members would be unhappy about investments in companies that have been shown to sell arms to shady militant groups or foreign powers that have used them against their own people, there is also a perfectly legitimate arms trade to enable democratically elected governments to protect themselves and their citizens. Arms can make people safer.

By contrast, cigarettes never make people healthier. According to the World Health Organisation, there are 5.4 million smoking-related deaths a year. Scotland still has a higher percentage of smokers than elsewhere in the UK. Investing in tobacco firms runs contrary to attempts to improve health and implement smoking bans.

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