Ukraine – Can trustees take the "moral high ground"?

Most UK pension schemes will (directly or indirectly) hold investments associated with Russia – investments in companies headquartered, or listed in Russia, or in companies with strong business links to Russia.  The invasion of Ukraine has seen a rush by organisations to distance themselves from anything that might support the Russian war machine and trustees should consider if they need to make changes to their investment strategy.

Trust-based pension schemes are odd creatures from a legal and investment perspective.  Trustees invest not for themselves, but for the benefit of their scheme members and dependants: first and foremost, the scheme's assets are there to provide members' retirement benefits.  For DB schemes, this means trustees are obliged to invest in a way that maximises the chance of delivering promised benefits in full (subject to appropriate risk tolerances) and for DC schemes, offering appropriate, value for money funds.  Trustees' ethical views should not be a factor in setting their scheme's investment strategy. 

In practice, public perception of an investment's ethical or moral status will often have financial implications and trustees must factor these into whether the investment is an appropriate one. In the case of investments associated with Russia, sanctions and consumer and market sentiment have resulted in sudden and significant price reductions and volatility and loss of liquidity, with the expectation being that Russia will be an unattractive place to invest in, at least the medium term. Trustees should take investment advice on the financial implications of being invested in, or disinvesting from Russian assets and consult their scheme sponsor about any proposed change of strategy. 

And what of members' views?  Can and should trustees take them into account in setting their scheme's investment strategy? 

The law requires trustees of schemes with 100 or more members to state the extent to which they take account of member's ethical views. This implies that trustees can, but don't have to, take account of those views. The Law Commission's view is that trustees can take into account ethical issues where they have good reason to consider that all or the vast majority of members share an ethical position and it would not involve a risk of significant financial detriment. While in many cases, it will be difficult for trustees to satisfy themselves that these tests are met, the current situation is one where it seems reasonable for most trustees to assume that nearly all members would consider that disinvesting from anything which may support Russia is the right thing to do.  With Russian-linked assets being a small component of most scheme portfolios, their exclusion from a scheme's portfolio also seems unlikely to have material consequences for its members. However, where trustees do have exposure to Russian assets, they may find it difficult, or impossible to run it down due to sanctions, or there simply being no functioning market.