What are the key questions you ask yourself when deliberating which pension fund basket to put some (or all) of your eggs in? Of course, for many people there is no choice – their occupational pension scheme is the only place to go. Others may look for pensions providers that have a good track record in financial returns. The security of the fund will also be a key consideration.

Until now, the approach that an investee company takes with regards to its own tax affairs probably hasn’t been on the radar (or at least not on the radar of the vast majority of a scheme’s beneficiaries). However, the recently announced Global Union Call for Action for Pension Fund Responsible Tax Practices (an initiative coordinated by the International Trade Union Confederation and the Trade Union Advisory Committee to the OECD) suggests that, as “the ability of global pension funds to generate sustainable, long-term returns depends upon a healthy economy underpinned by a fair tax system”, pension funds should respond to the headline dominating issue of corporate tax evasion and “incorporate tax risks as a core part of responsible investment policies”. Whilst this Call for Action is predominantly aimed at union trustees (with all of the signatories to date being either national or international trade union bodies), it doesn’t reflect any legal obligation that these trustees (or indeed, any other) are bound by…

Is this focus on an investee’s tax affairs really what the beneficiaries of pension funds want? When it comes to it, won’t most contributors first focus on security and then return? It seems to be a considerable leap of logic to assume that the beneficiaries expect the pension trustees to be able to judge the quality of their investments by reference to the tax planning profile of the potential investee company.

Even if one can confidently make that leap (!), how likely is it that aspiration can be matched with reality? By definition, this is not a bright light test, and may not be akin to describing the proverbial elephant. Will an investment manager or trustee really know what “unacceptable tax planning” looks like when they see it? For example, is the test based solely on the rate at which a company pays tax (i.e. the “effective rate of tax”)? Or is it the based on the numeric difference between the country of incorporation’s headline rate and the company’s effective rate? If the latter, does that mean that an investment in, say, a US company with an effective rate of tax of 21% is unacceptable whereas an investment in a UK company with an effective rate of 21% is fine? They both pay tax at the same effective rate but the US company pays broadly half its expected headline rate (when you fold in State as well as Federal rates). Isn’t the US company just trying to remain competitive (presumably a good thing for beneficiaries)? The scope for arbitrary and inconsistent decisions seems immense.

Whilst the Call for Action sets out the kind of tax practices of existing investments that should be internally evaluated by the fund, suggests that responsible tax considerations should be integrated into due diligence and evaluation processes for new investment mandates, and expects funds to engage with companies to encourage voluntary disclosure of tax payments (including “country-by-country breakdowns of revenue, tax and use of subsidiaries in secrecy jurisdictions”), will these subjective judgement calls get the backing of those whose money is being invested? Or does this feel too much like a mini enforced ethical investment policy (and one that may not result in the highest returns for the investor)? Watch this space.