Time for radical changes in our pensions! Photo: Olha Afanasieva / Shutterstock.
Our pensions can change the world
11th January 2014
The UK's pension funds are worth a colossal £3 trillion - yet few have any idea what 'their' pension money is doing. As Rebecca O'Connor reports, activist pension holders can now shift their funds towards green, ethical investments ...
People in financial services are not necessarily very ethical people. They are driven by returns.
Pension funds are among the most powerful organisations on the planet. Around £3 trillion is invested in pensions in the UK alone - that's almost the same as the entire country's GDP.
The managers deciding where that money goes are not only responsible for the retirement savings of millions of people, they are also responsible for 22% of total UK greenhouse gas emissions.
Pension funds 'own' 22% of UK's GHG emissions
As the environmental data specialist Trucost explains:"Since the aggregated 118 funds own approximately 1.4 per cent of the total market capitalisation of these companies, they 'own' 1.4% of greenhouse gases emitted by them annually, or 134 million tonnes of CO2-e. This equates to 22 per cent of total UK GHG emissions."
The message is being promoted by ShareAction, the campaign group lobbying the pensions industry to divert funds away from fossil-fuel burning companies and towards sustainable investments.
This is an especially important campaign to run now, as pensions auto-enrolment continues to be introduced, adding 6-9 million new savers to the UK's private pensions system, which is already the third largest in the world.
The 'carbon bubble'
One of the biggest arguments in favour of en-masse 'divesting' from fossil fuels is that by keeping peoples' retirement savings invested in activities associated with pollution, fund managers are putting those savings at risk of a 'carbon bubble'.
And if that bubble bursts - which seems inevitable sooner or later - that will wipe out retirement savings for millions of people. So it is in our financial, as well as environmental interests, to pay attention.
But trying to encourage pension funds to switch away from fossil fuels and towards sustainable investment alternatives is an incredibly tough ask.
Pension funds are mandated to do one thing only and that is to safely deliver a return that is sufficient to provide an income to savers invested in the fund in retirement.
Their criteria are strict and risk averse. They will rely heavily on historical performance to judge what assets should or shouldn't be included (rather than predictions of carbon bubbles that might not come to pass).
And these criteria make it difficult for them to choose sustainable investments just because they are sustainable - they'd have to fit all the other criteria too.
Moving your pension is not easy
The other reason that it is a tough ask is that unlike a campaign to get people who are disenchanted with their bank to move their money, you can't just move a pension. If you switched out of a workplace scheme, you would lose the valuable employer contributions that make workplace schemes worth having.
But before you even get to the point of thinking about what your pensions savings are funding and what to do about it, you have to overcome the monumental collective apathy that surrounds pensions.
Like death, or tax, no one wants to think about pensions. And when they do, it is likely to be about how to maximise it before retirement, not how to make it more green.
Perhaps, with stories about the Church investing in Wonga and Comic Relief investing in arms and tobacco, awareness about what other people are doing with our money that we might not like is growing.
What is harder is knowing what to do about it. Depressingly, IFAs report very little demand for their ethical screening for pensions service. This could be down to a lack of education about the power within our pensions.
The market is driven by returns, not ethics
But as Alan Higham, of Retirement Angels, says: "In our world, this (the environment) is not a concern that anyone raises. And the people in financial services are not necessarily very ethical people. They are driven by returns."
Being returns driven is not necessarily a bad thing. Renewable energy, for example, is attracting more and more investment from pension funds, the latest being Hermes: the infrastructure fund manager that controls roughly £2.6bn on behalf of the BT Pension Scheme, among others. They just bought a majority stake in the 114MW Fallago wind rig in Scotland.
Mainstream Renewable Power, an Irish developer, also announced this week a new scheme enabling pension funds and insurers to invest directly in its wind and solar parks, saying that the new venture would be a good option for those that "want to benefit from government-backed, long-term cash flows by investing directly into the company's wind and solar projects."
Sustainable assets often produce precisely the type of return that suits pension savings: long-term, uncorrelated to the stock market and steady, predictable revenue streams. So a pension that takes care of the planet does not have to mean financial sacrifice.
But there are ways in which you can act
Luckily, there are a few things all pension savers can do. Tom McPhail, a pensions expert from Hargreaves Lansdown, the financial adviser, says:
"If you are in a company pension, that scheme will have a statement of investment principles. If you can't find it, go to the trustees and ask to see it.
"Although a fund manager is unlikely to change his or her investment strategy because some pension savers don't agree with it, the trustees are in a position to say to the fund manager that ‘you don't meet our investment criteria any more, we're going to sack you.'"
The problem is there are not many pension funds around that actively invest on the basis of social or environmental criteria. "A fund might screen out things like tobacco or arms for hygiene purposes, but it is unlikely to be actively ‘ethical' ", says McPhail.
One alternative - self investment
This means that the alternatives within the traditional managed pension fund universe are going to be limited for savers who are very concerned about these issues.
Besides putting pressure on your pension fund trustees, is there anything else you can do? "There is scope to move schemes with former employers and top them up in a separate arrangement, and this is where a Self-Invested Personal Pension (SIPP) might come in", says McPhail.
But then the ball really is in your court and the performance of your fund is your own responsibility, he says:
"You have to do your research as a SIPP is completely at your discretion. There could be a high concentration of risk. You can buy shares in individual companies if you wish but you will pay stockbroking fees of between £5 and £20 a transaction and a 1.5% management charge to the SIPP provider."
Moving an old workplace scheme
Moving an old workplace scheme might also save you money, as some employers charge higher fees to former employees, which can bite off a huge chunk of your savings over the life of a pension. The cost of a transfer is usually about 5% of the pot, and so is usually only economic on pots worth more than £10,000.
Mr Higham says: "More and more people do want to make their own investment decisions. But if you want to make green investments, check what investments are allowed in a SIPP and what aren't.
"Domestic solar panels, for instance, cannot go in a SIPP. Other things to be aware of are that sometimes, fund charges can be higher on ethical funds, because managers have had to go to more trouble to put them together.
"Some green investments could also involve more risk, particularly if all of your investments are green - you still need to be mindful of the need to diversify."
More esoteric choices ...
Besides stocks and shares, there are some more esoteric green investments you can make in a SIPP, like debentures in renewable energy projects. Bruce Davis, joint managing director of Abundance Generation, says:
"Debentures offer a combination of long term income returns and early repayment of capital in instalments, which make them very attractive to people looking to invest for their retirement. Renewable Energy Projects are also an uncorrelated asset class which allows individuals to diversify their risk and returns away from conventionally listed investments."
Just be careful though: capital invested in debentures is at risk and returns are variable. These are long term investments and may not be readily realisable!
Notes for younger savers
It is not typical for young people to think about pensions, but it is young people who bear all the investment risk in defined contribution pension schemes and are particularly exposed to the financial implications of climate change and natural resource scarcity, who could have the most sway on the future of retirement savings.
The Green Light campaign focuses on these younger savers. So far thousands of people have emailed their funds and the campaign is supported by a coalition of unions and NGOs. A number of local pressure groups, such as West Yorkshire Council and East Sussex County Council, have been formed with ShareAction's help.
But there is a long way to go. The spokespeople I contacted for this story at the National Association of Pension Funds and the Association of British Insurers - the two biggest trade bodies for the pensions industry - were not aware of the campaign or of ShareAction.
What you can do
- Write to trustees of past and current pensions to ask for statement of principles.
- Using the template on ShareAction's Green Light Campaign, write to your pension fund asking for them to switch their investments out of fossil fuels and towards sustainable alternatives.
- Consider moving old employer schemes that do not match your values to a Self-invested Personal Pension
- Check to see if a pressure group for your pension fund has already been set up and join it.
- Tell your friends to do the same!
Rebecca O'Connor is editorial director for Trillion Fund.
Using this website means you agree to us using simple cookies.