Planning for the future: What is the truth about your pension and the environment?

Open-pit coal mining near Cottbus, Brandenburg, Germany.

Are your savings supporting the fossil fuel industry? George Hammond of ShareAction argues that it is the responsibility of pension fund members to make their voices heard and ensure their schemes are acting responsibly.  

The pensions industry is hugely powerful, and how it uses that power will have enormous effects on savers, society and the environment.

In the last few months, millions of individuals in the UK will have made their first payment into a pension. Since 2012, automatic enrolment – which makes it compulsory for employers to provide pensions for eligible employees – has bought 6 million savers into an industry that already boasts over £2 trillion of assets in the UK alone.

The Black Box

To put that figure into context, in 2015 UK pension funds managed assets that were equal to 112% of national GDP. And while the Chancellor’s red box sets out national spending and borrowing, our vast pensions industry operates as more of a black box.

Ask a pension saver where their money is invested and typically they will draw a blank. The fund is thought of as a grand piggy bank – to be shaken or broken many years down the line, until then it shall remain undisturbed. This paradigm serves the industry, allowing it to skirt any tricky questions members may have, by being largely opaque.

Who are you funding?

A pension, however, is not a static investment. Savings build up over decades through constant investment, reinvestment and manoeuvring between asset classes, according to the whims of a medley of asset managers, investment consultants and assorted intermediaries. Whatever the size of your pension and irrespective of where it’s held, the chances are that among those investments you are financing the extraction of coal, the manufacture of weapons and the production of tobacco.

If your fund is passively invested – meaning that it simply ‘tracks’ a given market, such as the FTSE100, rising and falling with the market – then the above is almost certainly true. Even if your savings are actively invested – which means that fund managers allocate assets with some discretion – the chances are they will go to the same companies. This is the case because investment managers are obliged to diversify their portfolios across a range of industries; because over the last two decades oil and gas have delivered investment returns second only to tobacco; and because the fossil fuel industry is a reliable payer of dividends.

Investments don’t solely go on company shares. If you have a pension with the Universities Superannuation Scheme, you and 329,999 colleagues own 10% of Heathrow. If you prefer to drive, stop in at one of the 45 Moto services – you own each and every one. While you’re there fill up from one of Shell’s pumps, with whom you have over £300m invested, which is close to £1000 per member.

Powerful, but conservative

Through these investments, the pensions industry wields a great deal of power. Institutional investors such as pension funds can, and have, changed the behaviour of individual companies, industries and even governments. When institutions divested from South African companies to protest against apartheid, currency devaluation and spiralling inflation helped weaken segregationist laws. Last year, investors put forward resolutions at BP and Shell Annual General Meetings which require the companies to disclose their corporate strategies on the risks of climate change, and which were passed with 98% support from shareholders. And last month, shareholder action cast an unwelcome spotlight on BP chief Bob Dudley’s exorbitant pay package.

Pension funds are typically reluctant to use this power. It’s far easier for them to invest in line with the prevailing sentiment of their industry, to be conservative and to ignore all but the purest profit-driven motivations. But funds are no more than a massed pool of individuals’ savings, and in much the same way we expect our vote at the ballot box to give us a voice in a political system we should expect that our savings give us a voice in the investment system.

This last point is particularly true when the system lets us down. Pension funds have largely failed to react to those who point to the financial risks of climate change, not least the Governor of the Bank of England Mark Carney. Members, not bound by the same short-term pressures as fund managers, appear better equipped to register and respond to arguments around long-run risk.

Time for savers to have a say

Increasingly, the burden of investment risk is borne by individuals as funds transition from defined benefit models which guarantee members a set retirement income, to defined contribution models in which pay-outs are determined by investment performance. In this context, savers should be making their voices heard on how their schemes are investing. There are a range of ways to do so, from writing to the fund’s trustees to moving savings into ethical options or looking for a different provider.

This is not a question of managing the minutiae of a portfolio – a task for which experts are rightly employed – but of ensuring that savers are not pouring money into industries they may be fundamentally opposed to, and which could threaten the value of their retirement income in decades to come.

 

ShareAction is a charity campaigning for Responsible Investment. They aim to persuade major shareholders such as pension funds and fund managers to challenge companies about environmental, social and corporate governance issues.

Members of the Universities Superannuation Scheme are invited to attend a ShareAction event to learn what the fund is doing to protect investments from climate change, and hear from USS’s chief executive and leading climate scientists including Grantham Institute Co-Director Prof Joanna Haigh at UCL on 9 May. Find out more and register

 

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