These start for anyone offered membership of a company pension scheme; the type where the employer makes contributions on behalf of each member, which can then be topped up by the employee.
Schemes of this type fall into one of two categories: either 'defined benefit', or 'money purchase', depending on the basis used for calculating pension at retirement.
Defined benefit schemes pay a pension based on multiplying years of service in the scheme by an accrual rate or fraction, which determines pension as a percentage of salary at retirement. Money pension schemes put contributions made on behalf of individuals together into a common investment pot. At retirement, member's pensions depend on the fund's performance.
In both cases, a pension fund is created for the benefit of all its members. To qualify for Inland Revenue tax relief, these funds must be set up in legal trusts. Individual members are beneficiaries of the trust, with their interests looked after by a board of trustees who appoint but remain separate from investment managers running the fund.
According to Lee Coates of the Ethical Investors Group: "Only a tiny fraction of these pension funds are managed according to clear-cut ethical criteria. The main reason for this is that trustees must act on behalf of all members, and have fiduciary obligations to ensure that they give the best returns available."
In practice, this means that many scheme members are building pension provision in part from investments that they would not otherwise buy on ethical grounds. Funds are likely to include a high exposure to FTSE 100 companies, the hundred largest traded on the London Stock Exchange. These shares account for some 70 per cent of daily trading values on the stock exchange. However, Eiris claims that fewer than 40 of the 100 are acceptable on ethical grounds.
Pension funds may also need to hold substantial cash reserves and to buy fixed-interest securities such as gilts, which are issued by the Treasury. Clare Brook, ethical fund manager with NPI, an ethical fund provider, says: "We have little choice about putting cash into the international money market, or buying gifts, because there are so few ethically acceptable alternatives."
Of course, employees unhappy with the investment policy of a pension scheme can choose not to join, or to contract out of it. But employers are under no obligation to make the same contributions to any alternative as they offer with membership of the sponsored scheme.
"This can make sticking by your principles very expensive," warns Mr Coates. "As an alternative, you can challenge the scheme trustees about how they run the fund. But they are only obliged to answer objections of a financial nature, not those raised solely on moral grounds.
"The key to a change of policy often lies with the fund managers not the trustees," thinks Mr Coates. "If the managers don't offer an ethical option, but are keeping the trustee's happy, members will be fobbed off. But if the fund managers already offer an ethical option, switching to it is easy."
Clare Brook agrees, arguing: "Pension funds should be converting to ethicality, and investing into the future. All too often, trustees have a prejudice against the idea of applying ethics to investment."
Meanwhile, NPI has launched a Social Index, measuring the performance of 150 UK stocks, and intended to replicate movements in the FTSE All- Share Index. Companies are selected for being socially responsible, and Ms Brook hopes that "the Index should show trustees that a pension fund can be run without necessary conflict between the application of ethical standards and their fiduciary duties."
Investing into ethical funds through retail pension products is much easier and a full range of these products are now available, such as pension top-ups, also known as "free-standing additional voluntary contributions (FSAVC), executive pension plans, and pension trustee plans. Anyone opting out of Serps, the state's earnings-related scheme, can choose to have their higher National Insurance contributions paid into a "contracted- out" personal pension, and invest into an ethical fund.
The important issue here is which type of ethical fund you choose. Most providers already offer an ethical unit trust, and reproduce its asset allocation in their pension fund. The largest of these, Friends Provident's Stewardship Pension Fund, has achieved average annual growth of 13.86 per cent over the last five years. But some smaller funds, including Clerical Medical's Evergreen and Abbey Life's 'Ethical', have shown lacklustre returns.
Few of us want to take risks with our pension provision, and all of these funds can be criticised on the grounds that they have too much exposure to shares in small- and medium-sized companies. Long-term fund growth may or may not equal that of non-ethical funds, but in the short-run, they can be expected to show greater volatility than non-ethical funds.
Providers like NPI and Skandia have responded to this criticism by offering ethical "managed" funds that hold far higher ratios of their fund value in large company shares, cash deposits, gilts and a variety of fixed- interest securities.
NPI's Global Care Managed fund holds the same asset ratios as non-ethical managed funds, with up to 45 per cent in FTSE 100 shares. Since launch in June 1996, this fund has performed strongly, coming seventh in a sector of 278 non-ethical managed funds, and turning an initial investment of pounds 1,000 into pounds 1,482 by the end of last month.
Mr Coates believes that "funds like this represent a necessary compromise between the strict application of ethical principles and the need to reduce risk."
The Independent has produced a free 28-page 'Guide to Ethical Finances' by Nic Cicutti, the paper's personal finance editor. The guide, sponsored by Friends Provident, has information on all aspects of money and ethics, including retirement planning. Call 0800 214487 for a copy or fill in the coupon on page 4.Reuse content