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PENSION TALK Volume 1 Number 1: Fiduciary Duty

For many years, trade unions and other social movement organizations have drawn attention to the important role that our pension funds play in the financial markets and the broader economy. CUPE has advocated the development of strong policy which would guide the investment of our pension funds away from those businesses or governments that we do not support, and towards projects and investments which meet objectives that we do.

This advocacy work is having an impact. There are pension funds which:
· use different techniques which screen out the stocks or bonds of companies whose operations are particularly harmful for the environment, emphasize production of armaments and weaponry, or exploit child labour (to name a few examples)
· have consciously chosen to retain all of their investments within Canada, supporting Canadian investment and Canadian jobs
· have directed portions of their investment toward broadly-supported projects which combine important social objectives with secure and reasonable rates of return (such as low-income housing development).

While these examples remain a relatively small portion of the total of pension fund assets, they are a vital first step in demonstrating that pension fund investment is in a different category from the rest of the financial industry.
As workers deferred wages, pension funds should be meeting the combined interest of a reasonable and secure rate of return and supporting a broader economic environment which maintains and enhances the long-term interests of workers themselves. And clearly, pension funds must not be used in ways which undermine and weaken the employment prospects of the members of the pension plan themselves.

What Is Fiduciary Duty
Fiduciary duty refers to the special legal responsibility of those in control of trust property (such as pension funds) to meet the interests of the true owner. The established and highly profitable pension industry including the vast majority of its money managers use fiduciary duty arguments against investment policies that reflect union values and principles. Of course, the ultra-conservative professionals who generally get to define the interest of the plan owners have usually simplified it into a very narrow notion that investment funds held in trust must be invested with an aim to maximizing the rate of return, blind to any other aspects of the investment.

However, blindly maximizing rates of return does not always represent the broader interest of workers. Workers and pension plan members have a unique interest in their own employment, overall employment levels, and the continuing operation of a sustainable and healthy economy. For us, the fiduciary duty of pension plan administrators must include consideration of these broader interests.

However, this presents plan trustees with a challenge. Which investments will serve these broader interests, and which will not? And on what basis do we make these determinations? While these questions are difficult, they can be answered:
What Investments Best Serve Workers Interests?
Certainly, it should be very obvious that an investment decision which could have the immediate impact of job loss among plan members themselves would not be in the interest of those same plan members or the plan as a whole. For example, if plan trustees for the pension fund owned by a group of hospital laundry workers invested in the stocks or bonds of a company which was seeking to contract-out hospital laundry services, a very clear case can be made that those plan members interest would not be served. This is obvious quite apart from the rate of return that the stock might generate. As there are a significant number of companies whose objective it is to take over what are now public services (and, in effect, undermine public sector jobs or job security), pension fund trustees must be very sensitive to these kinds of broader impacts.

How Do We Determine What Investments Best Serve Workers Interests?
· Retaining crucial investment in the Canadian economy (at a time when many non-pension investors are taking their capital out of the country) can clearly be defended as fitting within the scope of workers broader interest.
· As mentioned above, screening out investment in companies who have records of abuse of the environment, health and safety standards, or their own employees should also be defensible.

In Canada, several services and organizations now provide such screening at minimal cost. Certainly within the non-institutional investment sector, there is a great deal of evidence that screening possible investments according to such criteria does not mean sacrificing rate of return. Some observers have even suggested that screened investment portfolios can offer a higher rate of return, possibly reflecting the long-term economic wisdom of commercial practices which respect some of these basic labour principles.

How Do We Balance Socially Responsible Investing With Fair Rates Of Return?
Does all of this suggest that pension fund trustees should be able to invest in anything, regardless of rate of return? While the debate regarding the balancing of workers broader interests is likely to continue, we would argue that there remains an important fiduciary obligation on pension fund trustees to achieve reasonable rates of return. This means that replacing inappropriate investments with those that are considered appropriate can only be done where the alternative offers a reasonable rate of return. While clearly no one can predict rates of return on any given investment, experts do have methods of assessing risk-and-return tradeoffs. There are always alternatives.
This perspective is certainly supported by the provincial legislation that actually governs pension fund investment. This legislation, while slightly different in each jurisdiction, emphasizes the need to invest prudently and achieve fair returns. In Ontario (where most pension plans in Canada are registered), the legislation includes the following direction:

In the establishment and application of the written Statement of Investment Policies and Goals, the selecting of investments shall be made with consideration given to the overall context of the investment portfolio without undue risk of loss or impairment and with a reasonable expectation of fair return or appreciation given the nature of the investment. (emphasis added)
Ontario Pension Benefits Act Regulations, Section 67(2)

There is no reference in any of the Canadian pension legislation to an obligation to maximize returns. However, there is a limit. A pension fund clearly can not meet the above requirements if it is invested in something which is known to be highly risky or is certain or even likely to generate returns which are well below what could otherwise be achieved. Therefore, the analysis of possible investments should include both the narrow financial analysis which has traditionally been done and the considerations of plan members broader interests as workers.

At this stage, the vast majority of pension funds including those controlled by administrators that represent plan members continue to be invested according to a very narrow definition of the interest of workers. However, things are starting to change. As we move toward a framework in which the interest of pension plan members is viewed more broadly, we can expect to see more scrutiny of the other impacts that pension fund investment has on individual workplaces and on the economy in general.

Pension funds have become bigger players in the financial markets, and since public and corporate policy have often turned against the interest of workers, this greater scrutiny of pension plan investment should be encouraged by the labour movement. Finally, we must demonstrate that bringing a broader set of plan member interests into the development of pension investment policy is not only permitted but is a necessary component of fiduciary duty.

opeiu 491
Nov. 14, 2001
file: Pensions & BenefitsP3PenKitFiduciary Duty.doc