David Prosser: The ethics of pension fund investments

Outlook Kent County Council has got itself into something of a pickle. Anti-smoking charities and local healthcare practitioners are up in arms after discovering the local authority's pension fund has investments in four international tobacco companies with a total value of £25m.

Kent says the holdings account for only 1 per cent of the pension fund and that it has a legal duty to generate the best possible returns for scheme members, which prevent it ruling out investing in particular types of company.

In fact, that's not right at all. For while safeguarding the interests of members is the over-riding duty of the trustees of any pension scheme, that does not mean returns are the only consideration (even assuming that an ethical or socially responsible investment policy means sacrificing returns, which is a much-disputed argument). Indeed, there are many schemes in the public and the private sector that do require their investment managers to avoid putting money into certain industries – defence is common, as is tobacco.

The issue schemes such as Kent have to confront is what their members think. Too many schemes don't make enough information public about their investments, which deprives members of the opportunity to make their feelings known. And it is a small step from better disclosure to asking members to provide feedback on whether they'd like their scheme to adopt a particular type of investment policy – through a vote, or some other means. Plenty of schemes do exactly that.

Apart from anything else, isn't it rather odd to be investing in an industry at the same time as spending money on campaigns that could damage it financially? For this is what Kent is effectively doing with the support it offers local groups that try to help people to give up smoking. By accepting the pension fund's investment decisions, Kent is effectively saying its own public-health campaigns are going to prove ineffective.