The Pensions and Lifetime Savings Association (PLSA), the UK’s trade body for over 1,300 pension schemes with around £1trn in assets, has expressed caution over moves to introduce ‘social pensions’ into the UK, questioning scheme savers’ interest and literacy for such a product.
It expresses the sentiment in response to a consultation from the UK Law Commission investigating social investment by pension funds.
In a bid to mainstream the activity, the UK government has asked the Law Commission to investigate how far does or should the law allow pension funds to select an investment because it is thought that it would make a positive social impact.
It also wants the Law Commission to provide an accessible account of the law in this area, and to consider the legal or regulatory barriers to social investment.
Speaking to RI, Luke Hildyard, Policy Lead: Stewardship and Corporate Governance at the PLSA, said: “The objective of the work of the Law Commission is to get more people into investments with a positive social outcome and investment return. We are cautious about whether people are sufficiently engaged to opt into to such an option, when trying to get people to engage with a pension fund and where it invests is quite difficult.”
Hildyard cited examples of ordinary scheme members struggling with terms such as equity, bond and even interest rate. “More complex social investment concepts would be even harder,” he said.
In a letter to the Law Commission, the PLSA also says that though many polls find scheme savers, especially young scheme savers, express interest in ESG investing, there was “some discrepancy between these abstract responses to surveys and savings habits as observed in practice”.
It continues: “This disconnect between stated preference or intention and actual behavior is common across all areas of pension policy. It is possible, with a lot of effort, for an engaged employer to get employees to take decisions about their pensions….but, more commonly, people say one thing to researchers and then follow the line of least resistance.”
The PLSA stresses that in general, people struggle to take good quality investment decisions and says there is a need for careful thought on what the objective is when encouraging engagement with pensions and whether there is another route.
It says the Law Commission’s suggestion for a standardisation of social investments could make the area easier for savers to negotiate – though it would be “fraught with difficulties”.
“Who would be the appropriate body to define social investment, and how would they do so, given that both the positive and negative impacts of any investment portfolio are likely to be highly subjective,” it says.
It says a focus on the standards of default funds in relation to their social/ethical impact might be more productive than trying to persuade savers to explore options beyond the default fund.PLSA member USS, the Universities Superannuation Scheme (one of only two asset owner respondents to the consultation), expressed similar views. It says: “The vast majority of pension savers simply save into the default option. Provision of additional choice may simply add to the levels of confusion felt by many when faced with decisions they do not feel competent to make.”
It adds its recently introduced defined contribution (DC) ethical options saw some take-up from members making an active choice, though this still only constitutes 1% of members.
In contrast, the Investment Association, the UK’s trade body for asset managers, is broadly supportive of a social investment DC option. In its consultation response it says: “We see no inherent reason why DC schemes should not seek to invest in social impact projects. However, for a default arrangement, schemes will inevitably do this in the context of the broader debate about the meaning of fiduciary responsibility and the nature of the saver population.
“In particular, if there were to be a trade-off between maximising return and investing in social impact projects, fiduciary duty might lead DC governance bodies to conclude that the default strategy should aim to maximise risk-adjusted returns, given the investor bears all the risk, with social investment being an alternative option that DC savers could actively choose to invest in outside the default strategy.”
Legal & General, in its consultation response, also recommends a requirement in law of all DC schemes to offer a social pension.
Legal & General Investment Management (LGIM) is working on developing UK ‘social pensions’ that would adopt a similar model to the French ‘fonds solidaires’ (solidarity funds) savings schemes where up to 10% of assets allocated to employee savings funds are invested in social projects.
It is one of a handful of projects in the UK looking at social investment by pension funds. UK’s largest social investor Big Society Capital is working with leading pension providers on social pensions and is calling on the UK government to create an enabling policy environment for social pensions.
Big Society Capital is also involved in a taskforce on ‘social pensions’ set up by the UK National Advisory Board on Impact Investment.
And the UK Treasury has set up an advisory group to explore opening up social investment products to individuals, chaired by Elizabeth Corley, Vice Chair and formerly CEO and managing director of Allianz Global Investors.
It has been formed at the request of the Minister for Civil Society Rob Wilson and the Economic Secretary to the Treasury Simon Kirby to explore how the savings, pensions and investment industries, with the support of the UK government, can help individual investors support the things they care about through their savings or investments.
The Law Commission is currently reviewing responses to its consultation. It aims to publish its final report next month.