Recent proposals from the chancellor about the need for pension funds to scale up their investments in British business to boost growth have reignited debate around how and what our pensions are invested in and the impact they should have.
Pension reform is high on the political agenda, and for good reason.
The sector faces a series of crucial challenges, from ensuring retirees have enough income to live well on, to preserving a liveable planet for savers to retire into in the future.
It’s not just the government paying attention to this – new polling commissioned by responsible investment charities ShareAction and Finance Innovation Lab, as well as pension campaign group Make My Money Matter, shows significant levels of public concern around insecurity in retirement, resulting from climate change and inadequate pension savings.
More than two-thirds of people surveyed said they want to see government intervention on these issues. Climate is a key concern for savers, with 65% of those surveyed stating they believe the government should be doing more to help UK pension funds to invest in companies that help tackle the climate crisis, such as those developing electric cars or renewable sources of energy.
A third went so far as to say they would contribute more to their pension if it invested in businesses tackling climate change.
All this raises the question of what needs to happen to empower the pension sector to effectively tackle these challenges and address member concerns. Smartly designed regulation is vital for protecting pension savers, improving retirement security for millions and growing the economy.
The report highlights five key areas of policy action for the government: boosting pension savings and the state pension by increasing the mandatory minimum level of pension saving; ensuring default pension options focus on long-term investments; supporting pension funds to drive green investment in the UK; cleaning up pension funds through phasing out fossil fuel investments; and mandating transparency and accountability in the sector so people have a clear sense of the climate, nature-related and social impacts of how their pensions are being invested.
Unfortunately, as things stand, most UK pension schemes are contributing to the climate crisis by remaining major investors in fossil fuels. Make My Money Matter estimates that UK pension funds have more than £88bn invested in the fossil fuel industry.
Though there are some notable exceptions, UK pension funds make only modest allocations of capital into clean energy despite the urgent need for private capital to flow into the green transition.
What does cleaning up the sector look like in practice? It starts by requiring funds to have science-based 1.5-degree aligned transition plans. These need to be of a credible standard, including no assets or investments involving plans for fossil fuel expansion.
Another piece of the puzzle is reforming the legal responsibilities, known as fiduciary duties, where pension trustees need to make sure schemes are investing in optimal ways for UK savers. Currently pension funds tend to interpret their legal duties as beginning and ending with maximising short-term financial returns.
While these are, of course, important, this focus tends to disregard other factors which are clearly deeply important to pension savers and their quality of life: from the threat of the climate crisis to their personal ethical views around how their investments affect the world and environment they live in.
To truly serve the best interests of UK pension savers, we need a legal definition of fiduciary duty that provides clarity for trustees to take real action in considering social and environmental impacts alongside risk and return.
There’s no denying the deep problems that exist in our pension system.
However, these practical solutions show how it can be reformed in a way that truly works for pensioners, savers, our economy and our environment.
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