Pension funds and the financial market
The capital held by pension funds is enormous. The most recent data from Statistics Canada (2002) shows that the assets of trusteed pension funds for the third quarter of 2001 were $541.6 billion. That is just less than the combined assets of the major Canadian banks. Public sector pension
funds in Canada hold 64% of total pension fund assets. OPSEU members’ jointly trusteed pension funds total approximately $30 billion for the same period (OPSEU Pension Trust - $9.4 billion, CAAT Pension Plan - $3.8 billion and the Hospitals of Ontario Pension Plan - $17 billion). OMERS accounts for another $35.5 billion.
Internationally, the story is similar. By 1994, international pension assets were estimated at $10 trillion US. This is greater than the combined assets of all major corporations listed on the world’s three largest stock markets - New York, Tokyo and London.
The Pension Promise
Pension funds are the savings of employed workers that will provide them with a steady income upon retirement. They are deferred wages earned while working but paid upon retirement. Unlike RRSPs, mutual funds or other types of retirement savings, a defined benefit pension is not subject to
market risks or the success of particular investments. Instead, the pension is based on length of service and contributions to the plan. The value of an earned pension is guaranteed for the lifetime of the member (and their survivor). This guaranteed benefit is sometimes called the “pension promise.” OPSEU holds this promise paramount
Fiduciary duty
In fact and in law, workers have been guaranteed that their pension money would be safe and secure, because their funds are held ‘in trust’ for their retirement. Historically, this has meant that the person entrusted with their funds - the trustee - is a person who must behave prudently
with respect to funds and be loyal to fund members’ interests alone. This is known as fiduciary responsibility, or the so-called ‘prudent person’ rule. It is a central concept of trust law and a legal requirement of the management of pension fund assets in Britain, the United States, Canada, and most other industrialized countries.
Trustees must be prudent. They may not act out of self-interest or personal bias. They must act in the best interests of pension plan members.
Should Union Pension Trustees Be Any Different from Other Trustees?
Unions have been a catalyst for change in Canadian workplaces and society. Their efforts have improved the lives of not only unionized workers but all working people and Canadian society as a whole. The Canadian Labour Congress in its 1999 Constitutional Convention set out some values of
Canadian Labour: “taking social and political control over economic activity; achieving environmentally sustainable economic growth; full employment and ending poverty . . . public regulation of national and international markets, increasing community economic development . . . raising wages across Canada and stopping privatization and
deregulation . . . putting in place human rights laws, employment and pay equity laws, and health and safety laws to make sure the economy works for the disadvantaged . . . through employment equity and pay equity in collective agreements and in legislation for unorganized worksites . . . in Canada and in countries across the world.” These
same values can and should be at the forefront of our pension investment strategies.
Whose money is it anyway?
Pension funds in Canada control 35% of equities in the stock markets. Writers on both the left and the right have argued that unions could make companies more responsive to the workers’ agenda if they controlled their pension investments. Unfortunately, the reality is that the financial
industry largely controls the pension funds and sometimes works against the interests of social justice.
Given their tax-exempt status, pension funds can and should provide not only secure pensions for retirees but also supply the long-term capital needed to build a better country. OPSEU’s jointly trusteed pension plans are ideally placed to influence the investment of their funds so that
investment can have a more direct impact on economic growth and on job creation to the benefit of working people and their families.
What would a socially responsible investment look like?
Socially Responsible Investing usually denotes alternative investment strategies in the interests of workers and communities. SRI involves the integration of social and environmental criteria into the investment decision-making process. As such, it attempts to allow investors to match their
personal values to their investment decisions, and to consider both their financial needs and the investment’s impact on society. In those plans which have adopted SRI strategies the level of SRI investment is typically a small portion of the total funds in the plan.
The modern origins of SRI in Canada can be traced back to the mid-1970s, when faith-based organizations began to use their influence as shareholders to oppose apartheid and raise environmental and human rights concerns. In 1986, the first widely distributed socially screened mutual fund,
the Ethical Growth Fund, came into existence. Since then, SRI mutual funds in Canada have grown from $15 million in the mid-1980s to approximately $6 billion in 2000. Despite its recent growth, the development of SRI in Canada has lagged behind that in other areas of the world, especially the US.
SRI incorporates three main strategies: shareholder activism, which involves direct communication with corporate management and boards of directors; community-based investments (for example, investing in community-based co-ops and local entrepreneurs); and screening.
None of these approaches have been shown to lower investment returns. (Details of the studies are found in the main document.)
Shareholder Activism
Shareholder activism is used to describe a whole range of approaches towards the corporate sector and includes actions ranging from writing letters and meeting with corporate boards, to drafting and/or voting resolutions for annual meetings, to pulling shares – all in an attempt to hold
corporations accountable. Issues that have been dealt with range from executive compensation to expensing stock options to child labour in offshore operations. It can be a tool to encourage corporations to adopt principles that work in the interests of social justice.
One example of shareholder activism is a coalition of pension funds and financial managers recently drawn together by Ontario’s giant Teachers Pension Plan to foster good corporate governance. The OPT joined this group in December 2002.
Economically targeted investment (ETI)
Economically targeted investment (ETI) is an investment designed to produce a competitive rate of return commensurate with risk as well as create collateral economic benefits for a specific geographic area, group of people, or sector of the economy.
The BC labour movement has been able to protect construction jobs through Concert and Mortgage Fund One. Canada’s most extensive and successful example is in Quebec (the Caisse de Depot et Placement du Quebec). In the US, about $30 billion of pension funds are currently placed in ETIs. The
labour movement has played an integral role in this development because of its interest in creating and maintaining jobs in the construction industry.
Under SRI, pension funds would not be used to take over the ownership and management of public infrastructure and services. In contrast, the Ontario Municipal Employees Retirement System has used its members’ fund to invest in public-private partnerships resulting in the large-scale
privatization of public services. This privatization would not happen under SRI strategies.
OPSEU has historically endorsed pension fund investment in public service infrastructure projects.
Ethical Screening
Ethical screening, often called social screening, involves the application to an investment of social or ethical screens – either negative or positive. Certain features can be screened in or out of an investment portfolio. For example, companies with good labour standards can be screened in
and companies with a poor environmental record can be screened out.
OPSEU’s Staff pension plan has used ethical screening since its inception.
SRI and financial returns
Historically, SRI has had to fight the perception that it produces lower returns. Several studies have successfully challenged this view in finding that socially screened portfolios provide competitive returns to investors. Advocates of SRI explain that screening reduces potential
liabilities (such as class action lawsuits) and ensures better-governed companies in which to invest.
While ethical screens are relatively new for Canadian pension funds, they have been used in domestic mutual funds, and in several studies have been shown to be neutral in relation to the rate of return.
The California Public Employees’ Retirement System (CalPERS) with more than 1.3 million members and nearly 2,500 employers and assets of about (US) $170 billion has instituted a comprehensive screen for international investment (emerging markets) based on International Labour Organization
principles. This has not hurt their bottom line.
A recent Canadian study, Socially Responsible Investing: Better for Your Soul or Your Bottom Line?, carried out by Paul Asmundson and Stephen Foerster of the Ivey School of Business at the University of Western Ontario done over a five-year and a ten-year period concludes that rates of
return on screened ethical funds are indistinguishable from returns of the TSE 300 Total Return Index. As well, the study found that social and environmental screens may actually decrease risk exposure.
SRI and the fiduciary duty
Some fund managers have traditionally tried to intimidate union trustees with the dual myths that social investment lowers rates of return and violates fiduciary duties. The rate of return issue has largely been resolved by empirical study. The second myth is exploded below.
The British case of Cowan v. Scargill is often touted as the authority for a ban on all social investment. In the 1984, the British Chancery Court had to decide whether the union trustees of the Mineworkers’ Pension Scheme were in breach of their fiduciary duty in seeking to prohibit
overseas investments and any investments supporting an industry in competition with the coal industry. The Judge held that there was a breach and wrote that investments “must be exercised so as to yield the best return for the beneficiaries, judged in relation to the risks of the investment in question; and the prospects of the yield of
the income and capital appreciation both have to be considered in judging the return from the investment.” However, it is generally acknowledged that the breach of fiduciary duty resulted from the lack of due diligence in not considering the impact on retired members rather than targeting investments per se. Decisions in the UK subsequent
to Cowan v. Scargill have brought British case law more into line with the US cases to date. That is as long as trustees treat the interests of the beneficiaries as paramount, they may decide whether to invest in, or to retain, the securities of a corporation based on such matters as pollution, race discrimination, fair employment,
consumer responsibility, etc.
There has not been a decision in a Canadian court addressing the role or duty of union trustees in investment strategies. However, it is expected that the outcome of any Canadian case would parallel those in the US and UK.
What are our rights and responsibilities?
Union trustees can meet their obligations of fiduciary duty, deliver the pension promise and work in the best interests of social justice.
