8 November 2023, LONDON: LCP and Pensions for Purpose have written an open letter to Laura Trott, Pensions Minister, calling for investment in social and environmental sustainability, and intergenerational inequality to be at the heart of planned pension reforms.

In July’s Mansion House speech, the Chancellor set out a raft 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:

Structural barriers – The letter calls for structural change to achieve this. As funding levels have improved, many pension schemes have significantly de-risked their assets and are predominantly invested in gilts and low-risk corporate bonds, where there are fewer opportunities to hold impactful sustainable investments. This will be critical in the coming years, as we face the need to halve our CO2 emissions by 2030.

Fiduciary duty – Current interpretations of fiduciary duty often discourage long-term sustainable investments, despite evidence these investments can offer comparable or better returns. This letter calls for a re-think on the interpretation of pension trustee fiduciary duty. Reframing 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 – 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. 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.

LCP and Pensions for Purpose are calling for government to innovatively resolve some of these issues. Specifically, LCP have 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, commented: “We are supportive of incentivising pension schemes to invest in productive finance but believe such investing must support sustainable impact. Now is the time to break down existing structural barriers, 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, CEO for Pensions for Purpose, added: “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. This can only be achieved through collaboration between the pension industry, government and regulators. 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.”