UK UPDATE
In the UK, the developments have not been so racy, but there has been a gradual acceptance that the Scargill vs Cowan 1984 case, which appeared to condone the maximising of returns over all other duties, was not a satisfactory test case. This has led to two Law Commission reviews.
The first in 2014 noted that the Scargill v Cowan case was of limited use, stating that the pursuit of returns regardless of investment posed potential reputation risks which could damage a pension fund. Its own position was that maximising returns and considering investment risks were of equal importance. And while it did not refer to affordable housing specifically, it made the following point.
“Trustees may look for good infrastructure schemes which will both improve quality of life and provide good financial returns,” it stated. “And where two projects appear equally beneficial, trustees may choose the investment which will most improve beneficiaries’ quality of life. However, financial returns (to pay retirement and other benefits) are the primary objective.”
This logic would offer some justification for trustees, but in December 2016 Keith Bryant QC questioned how it might work if challenged.
“This exception has an air of unreality to it as no investment choice is ever likely to have an identical twin in terms of anticipated investment performance,” he said. Such ambiguity might be cleared up after Rob Wilson MP, the minister for civil society, asked the Law Commission to again look at this issue, as the government is keen to support social investment as a way to access private investment funds to support “charities, social enterprises and businesses with a social mission”.
One of the replies to this consultation came from Columbia Threadneedle Investments, a fund manager which is pioneering in the space of raising funding for social impact projects.
The firm stated: “There is a misconception that investing for a social good in some way inhibits the ability to also achieve a financial return for investors, which results in pension fund trustees shying away from investing in ‘socially significant’ infrastructure opportunities.”
The greatest inhibition is among defined contribution (DC) schemes, but large defined benefit (DB) schemes with scale have dipped a toe into this space. This is, particularly true of local government pension funds such as the Strathclyde Pension Fund, which is targeting an 8% return from a £15m investment in local housing projects.
The lure of such returns was part of the reason HSBC’s DB fund recently had an office property in its portfolio receive a change of use permission to residential housing on a 25-year lease.
Mark Thompson, chief investment officer of the HSBC Pension Scheme, describes the investment as a win-win: “It is the right sort of investment for my pensions and it is quite nice for the housing association.” Following the logic set out by the Law Commission, Thompson says it had to make good investment sense before he considered it.
GREATER POTENTIAL IN DC
Some of the greatest hopes for social impact investing lie with DC schemes as there would appear to be greater legal precedent to do so. In 2013, the DC Investment Forum quizzed 1,000 private sector employees who had not yet enrolled into a pension scheme and found 77% favoured a social investment fund over a conventional fund that offered the same returns. Furthermore, 44% still preferred a social investment fund even when told they would receive an 8% smaller pot at retirement.
The feedback from the Association of Member Nominated Trustees (AMNT) is similar. David Weeks, co-chair of AMNT, says that savers want their investments to have a bigger aim than solely maximising returns.
“Trustees feel their members have an interest in how their funds are deployed and increasingly there is a feeling that in doing well in financial terms they would like it to do well in broader objectives.”
