LCP and Pensions for Purpose have written an open letter to UK pensions minister Laura Trott calling for investment in social and environmental sustainability and for intergenerational inequality to be at the heart of planned pension reforms.
In July’s Mansion House speech, the chancellor of the exchequer Jeremy Hunt introduced a number of measures aimed at unlocking the growth potential of UK defined benefit (DB) schemes.
LCP and Pensions for Purpose are urging the government to encourage pension schemes to invest more in areas that drive forward sustainability goals.
The open letter pointed out that there is “significant evidence” that the success of the global economy is dependent on meeting the broad range of UN’s Sustainable Development Goals (SDGs). In particular, it said there are expected to be “devastating” societal and financial impacts if global net zero goals are not met.
In order to meet these goals, including the UK’s own net zero goals, the letter said that a significant amount of investment will be needed.
Structural barriers
LCP and Pensions for Purpose believe that private DB pensions should be able to provide a source of investment for this, however, they pointed out that in the UK there are no private pensions providing sufficient levels of investment in areas that drive forward sustainability goals.
They said that many of the sustainable impact investments they would like to see fall under the equity and private market asset classes such as technology to facilitate the transition to net zero economy, renewable energy and infrastructure, and other social impact funds.
The letter pointed out that private UK DB pension schemes, which consist of over £1trn of assets, do not currently hold a significant level of their investment in these asset classes which it said it was a “huge missed opportunity”.
This is due to improved funding levels which saw many pension schemes significantly de-risk their assets and turn towards Gilts and low-risk corporate bonds, where there are fewer opportunities to hold impactful sustainable investments.
Fiduciary duty
In addition to the structural issues within the DB pensions industry, another issue highlighted by the letter that may be limiting the actions trustees take on sustainability hinges around the interpretation of fiduciary duty.
It said that current interpretations of fiduciary duty often discourage long-term sustainable investments, despite evidence these investments can offer comparable or better returns.
The letter calls for a re-think on the interpretation of pension trustee fiduciary duty, explaining that reforming this duty could guide pension schemes to take a longer-term perspective when decision making, and contribute to broader climate and societal goals which are in their beneficiaries’ best interests.
Intergenerational fairness
The letter also expressed a concern about the societal risks that could be faced due to inequality. It said that intergenerational inequality is a particular concern in the UK and this will be exacerbated over the coming decades due to inequality in pension provision.
It said that UK defined contribution (DC) members are generally a younger part of the working population, whereas UK DB members tend to be older and often already retired. It added that there is a “clear risk” the current pensions system upholds systemic intergenerational inequality, which could pose a number of long-term risks to society and the economy.
Solution
LCP and Pensions for Purpose called on the UK government to innovatively resolve some of these issues.
Specifically, LCP has developed a Pension Protection Fund (PPF) ‘opt-in’ system for managing DB schemes. This aims to both preserve and improve DB members’ security, and enables schemes to invest for positive societal and environmental outcomes which benefit everyone, while generating long-term investment growth – one of the reform options contained in the Mansion House proposals.
Laasya Shekaran, consultant at LCP, said: “We are supportive of incentivising pension schemes to invest in productive finance but believe such investing must support sustainable impact.”
Skekaran added that now is the time to “break down existing structural barrier” and to look to new and innovative ideas to ensure pension funds can invest in ways which make sense for people and planet.
Charlotte O’Leary, chief executive officer for Pensions for Purpose, added that “clear action” needs to be taken on ensuring sustainability is integrated into all levels of pension fund decision making, including fiduciary duty, the governance process, mechanisms for consolidation and intergenerational fairness.
She said that this can only be achieved through collaboration between the pension industry, government and regulators.
She continued: “What we are talking about requires a paradigm shift in thinking and the time for that is now, not just to protect but to enrich pension member outcomes, society and the environment. We strongly urge the UK government, The Pensions Regulator and industry stakeholders to work with us in implementing these targeted reforms.”
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