Money & Ethics; So You Want a Pension with a Conscience? in the Latest in His Series on Ethical Investments, Iain Morselooks at Ways of Saving for Your Retirement without Compromising Yourself or Your Fund

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A survey commissioned by the Ethical Investment Research Service (Eiris), the ethical research group, shows that 73 per cent of us would like to see our pension funds run on ethical lines, while almost a third would accept some reduced financial returns as a consequence. Despite this, there are some tough choices to be faced by ethical investors when dealing with the practicalities of making pension provision.

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. …