Labour must reorient the focus of its pensions review to support investment that enables a just transition and delivers decent pensions for all, writes our CEO Jesse Griffiths. This article was first published in Buisness Green, it can be found here.
The new government wasted no time in putting pensions system reform at the heart of its economic agenda. A new Pension Schemes Bill to rapidly embed existing reforms was announced in the King’s Speech, followed by the first major review of the private and occupational pensions system for 19 years.
This reform will have major impacts for climate and nature, but this opportunity for change risks being wasted. The sheer scale of the UK’s growing pensions industry, which is currently the third largest in the world and holds over £2 trillion of assets, means it is a major potential investor in the green industries of the future. The government intends to consolidate the industry into a small number of very large funds, which, if properly designed, will have the ability to invest in a wide range of assets and could become major long-term investors. However, the industry is currently a major part of the problem, with research showing that UK pension funds have £300 billion of capital in companies with a high risk of driving deforestation, and £88bn in fossil fuel companies. Sadly, in the rush to get this agenda moving, the government seems to have forgotten to link pensions reform to their agenda to drive the just transition and deliver zero-carbon power system by 2030. This could easily be fixed by reorienting the focus of the review to support investment that enables a just transition and delivers decent pensions for all.
The failure to integrate environment into pensions reform would be a disaster for pension savers and the economy. There are two main reasons for this. The first is that the transition to a zero-carbon economy will radically alter the economy and change the value of the assets that pension funds are invested in. For example, one estimate is that half of the world’s fossil fuel assets will be worthless by 2036, with the UK suffering far larger financial losses than other countries, and the possibility of a 2008-style financial crash. The second reason is that the scale of the economic damage of failing to transition rapidly enough is large and uncertain. A recent analysis estimated that 3 degrees of warming – which is not far off the current trajectory of existing plans – would be equivalent to the damage of fighting a permanent domestic war. It would see output, capital and consumption more than halved by the end of the century. There is so much uncertainty about how tipping points and feedback loops could speed things up that the economic impact could well be significantly greater. The economic threats from the destruction of nature, and the ecosystems on which all life depends could well be even worse.
Sadly, the pensions industry is woefully unprepared for these economic and financial challenges. Recent research shows that the industry’s risk assessments massively underestimate the economic and financial losses that climate change will cause, thanks in part to poor understanding of the science. Meanwhile, the government is undertaking the biggest pensions reform for nearly 20 years, and has ambitions to be a world leader in the just green transition, but hasn’t yet linked these two agendas.
Thankfully, there is an achievable policy agenda for change that will deliver for pension savers, the economy and the environment. Obvious solutions include getting all pension funds to fix the failures in their risk modelling that can ignore the true impacts of climate change on their investments. The government could reform the duties of pension fund trustees to recognise the importance of sustainable investment for pension savers. Pension sector regulators should be required to integrate climate and nature across all regulations. Stronger regulatory action must be taken to stop damaging investments, beginning with prohibitions on the most egregious forms of fossil fuel investment, which some industry actors are already implementing.
Reform of the pensions system also offers major opportunities for boosting green investment and meeting the governments growth and clean energy superpower missions. Increasing the minimum pension savings rate from 8% of pay to 12%, which the industry is calling for, or 15%, which the unions support, would provide at least £10 billion of additional savings per year. This step change in scale offers an opportunity to agree compacts with the industry to drive more savings into green investment. The new National Wealth Fund could to be scaled up to partner with pension funds to invest in the UK’s burgeoning green economy. Finally, pension fund models could be redesigned to favour longer-term investment and better outcomes for savers, including by introducing more collective models, such as that pioneered by Royal Mail.
The government is right to prioritise reform of our pensions system, and to link this to significantly improved outcomes for citizens and the economy, but unless it links this to delivering the just transition we will all be worse off.