Saving for the planet: the problem with pensions

The Fridays for the Future campaign, co-founded by Greta Thunberg and other Swedish children of school age, explains the rationale behind the school strikes for climate movement in this way:

School children are required to attend school. But with the worsening Climate Destruction this goal of going to school begins to be pointless.

• • Why study for a future, which may not be there?
  • Why spend a lot of effort to become educated, when our governments are not listening to the educated?

Their concern, of course, is understandable – and increasingly so. Life on this planet has changed hugely over my own lifetime: the insects peppering windscreens on the occasional car journeys I experienced as a child have gone; it doesn’t snow as much; there’s plastic strewn on land and in sea; modern agriculture has modified and simplified ecosystems; traffic is everywhere; more and more of the world has been concreted over. The change has been profound. What changes, I ask myself, can those who are in their teens today expect to see if the damage goes unchecked?

We tell young people to study hard in preparation for their working future, and then we tell workers to work hard and save for their retirement. If children feel that time in school is time mis-spent as long as their future is not secure, then how will they feel, once they start working, about saving for a pension?

Work hard, pay hard

The 1870s saw workplace pensions begin to emerge in the UK, followed in 1908 by the Old Age Pensions Act, through which the UK Government for the first time provided non-contributory, state pensions. This first old-age pension was far from universal: it was available only to men over the age of 70 – despite the average life expectancy being 47 – and paid five shillings a week to a bachelor, seven to a married man. Still, it was a foundational block in building social welfare in the UK.

Today, state pensions are available to those who have made sufficient National Insurance contributions throughout their working life. Workplace pensions, meanwhile, are funded through contributions made by both employers and employees. In defined contribution schemes, the employee can decide how much to pay in, based on the size of future payments they seek – and on what they can afford. There are also personal pensions, where individuals make contributions, independently of their employer, into privately run schemes.

The Office for National Statistics (ONS) tell us that:

“At the end of 2015, total accrued-to-date gross pension liabilities of UK pension providers in respect of employment-related (workplace) pensions and State Pensions were estimated at £7.6 trillion, up from £6.6 trillion at the end of 2010 (not adjusted for inflation). The liabilities of UK pension providers are also the entitlements of households.”

‘Gross pension liabilities’ just means pension providers’ outstanding pension obligations. Of the £7.6 trillion obliged payments, £5.3 trillion was the responsibility of central / local government, while the remaining £2.3 trillion was not, and was instead largely related to workplace pension entitlements of – mainly – private employees (some with benefits linked to ‘final salary’, others not). These numbers are fairly eye-watering, because UK GDP in 2015 was just below £1.9 trillion, meaning that gross pension liabilities for the year amounted to four times the UK’s total GDP.

In order generate enough money to cover their liabilities, pension providers invest employer and employee contributions into investment portfolios, spread across various companies and sectors. Employers, in choosing workplace pension providers and schemes, are therefore indirectly funding the businesses invested in, as are individuals choosing personal pensions.

If you are concerned about the threats associated with irreversible climate change, or of poor air quality, or of species loss, or of plastic pollution, or of mass consumerism, the question arises: where should you direct your pension savings? Furthermore, how easy is it to choose?

When your SIP comes in

At Eunomia, my colleagues and I have been looking into this question.  Much has been written about pension schemes divesting from fossil fuel investments, but finding a scheme that really does this is more difficult than it first seems. For a start, the ‘environment, social and governance’ (ESG) requirements that The Pensions Regulator (TPR), the UK’s supervisory authority, places on pension funds are barely worth writing about.

New ESG regulations came into force in October 2019, requiring pension funds’ scheme statements of investments principles (SIPs) to include policies on ESG considerations and the extent to which the ethical and environmental views of members, along with other non-financial matters, factor into planning investments. Starting in October 2020, trustees must also report on how these policies have actually been implemented.

A report from the UK Sustainable Investment and Finance Association (UKSIF) found, however, that there has been “an appallingly poor rate of compliance with the ESG regulations”. Many medium and large schemes have failed to publish their SIPs; those that have been published contain “policies on ESG factors like climate change are vague and non-committal”, phrased in language that “allows schemes and their investment managers to do very little”: qualifiers like ‘where appropriate’ abound, and many fail to set timeframes for action.

UKSIF recommends that TPR launches an urgent thematic review of the state of compliance, and creates a publicly accessible SIP repository of trustee reporting. It also makes several recommendations regarding how TPR can improve future guidance. These include asking to schemes to list specific actions related to each policy, in order to combat the current vagaries of reporting, and requesting that trustees report on the ESG credentials of both their investment managers and investment advisers.

The truth is that the average pension fund includes investments in funds and equities that no citizen concerned for the future of the planet would choose to invest in. For example, a report from responsible investment charity ShareAction notes that “many financial indices still contain a large percentage of oil and gas and mining stocks.” It is not only these obvious climate change offenders – pension schemes invest in a wide range of industries that contribute to other environment and social problems.

The stocks held by pension funds can mostly be characterised in ‘shades of bad’, with a very few exceptions. The bottom line is that the industry that claims to be providing for our future is instrumental in destroying it.

The point of no return

Cleansing your pension of investments that imperil your future is far from straightforward. Most major schemes to which employees default include only a derisory level of investments (if any) that could be considered ‘planet friendly’, and a weighty share of ones that hasten the demise of our life support systems.

As an employee, the first thing to do is ask where your money is going, and to request that your employer provide an option allowing you to choose a green alternative – after all, it’s clear that TPR rules are insufficient. It’s unsurprising that the TPR rules are not shifting behaviour, given that they actually don’t require funds to change anything for the better, only to say what they are doing. This could easily be ‘nothing’, which seems to be exactly what is happening.

My own take on this is that the way fiscal policy is mis-used is a major part of the problem. All governments, globally, are failing to use this tool – of taxing things that cause environmental harm – to the extent necessary to address the crises we are in. Too many investments which we cannot, as a planet, allow to be made are still rendered profitable as a consequence of a failure to tax carbon, air pollution, water use, water pollution, harmful land-use, pesticides, fertilisers, material use… the list seems endless.

A crucial role for government in supporting a transition to a green economy is to render things that have no place in a green economy ‘no longer financially viable’, especially when compared with the green alternatives. Investments in activities that threaten life on this planet are clearly bad investments in the widest sense; taxing such activities would reflect this by making them bad investments financially. Then, with more attractive green alternatives, saving for one’s future might truly be an investment in a future worth living.

Featured image: Danny de Hek (CC BY-NC-ND 2.0), via Flickr