Pensions, by definition, involve thinking about the future. All too often this means they get treated as something you set up and then forget about while you focus on the present. As such, people tend to overlook the power of their pension in the here and now – viewing it as a source of personal security rather than a force for change.
But your pension will almost certainly be invested in companies that can play a significant role in global efforts to tackle the climate emergency and other crises, such as growing inequality – whether through their actions or their inaction. With an estimated £2.6tn invested in UK pensions, those investments can exert an influence on the direction companies take. After all, businesses are answerable to their shareholders and investors – which makes your pension key if you want to have an impact on the world.
“Your pension is directly invested in these companies, and depending on which pension provider you use, and the strategy they take, it can sit there just ticking along and making you money, and for some people that’s enough,” explains Sophie Johnson, an analyst on the Responsible Investment team at Royal London. “But at the same time it could also be used to address societal issues such as whether there’s enough diversity on the board, or whether a particular company has got the right climate change strategy.”
While the world of pensions has often been perceived as rather opaque, pension funds are recognising and responding to a growing interest from investors in how their money is put to use. This means offering pensions that are invested responsibly and providing much more information regarding their different investment criteria and policies – so that people can better choose a pension fund or fund manager that matches with their own values and concerns.
According to the financial data provider Morningstar, net assets held in UK funds that invest according to more stringent environmental and social principles grew from £29bn at the beginning of 2017 to £71bn by the end of 2020 – illustrating the growing consumer demand for responsible investment products.
“Pension funds have power, because they invest a lot of money in company shares,” says Simon Bullock, a partner at the financial planning practice Mulberry Bow, which provides pensions advice to individuals and companies. “To use an extreme example, if every pension fund pulled out of a particular company’s shares, there’s a fair chance those shares would suffer. That can have a big impact as it affects the remuneration of the senior leadership, and it can affect that company’s ability to borrow cheaply on the bond market.”
Another way that pension fund managers exert influence on companies is by voting during the company’s annual general meeting (AGM) on issues related to how each company is run. These issues range from the pay structure of executives, to whether different board members should be re-elected and, increasingly, the implementation of a climate transition plan.
For instance, ahead of each AGM, Johnson and the other three analysts on the Royal London Responsible Investment team sift through reams of data – which can include information on a whole range of environmental and social factors, from workforce pay policies to plans to reduce carbon emissions.
If they like the progress a company has been making, they will back the current leadership. But if it is felt to be failing, they will use their influence to try and enforce change. As the UK’s largest mutual pensions and investment company, with £153bn in assets under management, Royal London currently votes at more than 3,500 company AGMs a year.
Johnson describes how Royal London has been working with a large mining company over the last six to seven years to improve pay disclosure, reduce the number of fatalities that occur during mining and, recently, to encourage the setting of targets relating to the climate crisis. This has involved many face-to-face meetings and repeatedly voting against executives who they view as being responsible for insufficient progress on these issues.
“We’ve been meeting with them multiple times a year and telling them that we’re not happy with the fact they do not disclose how their top executives are paid and incentivised, and their record on fatalities,” she says. “They’re mining in dangerous parts of the world and there are many difficulties associated with that, but the lack of improvements year-on-year was unreasonable. This year, we’ve started to see some progress. They are still far from perfect, but published a climate transition plan with reduction targets and formally implemented a long-term pay scheme linked to their performance on environmental and social issues. We are keeping up the pressure through our voting to ensure that they build on these positive steps.”
In another example of shareholder engagement – this time at a retail company – Johnson explains how Royal London voted against the director responsible for diversity in previous years, but in late 2020, following on from those votes, they had a meeting with the company. “There was a complete turnaround in approach,” she says. It now has a board diversity policy in place and clearer commitments to inclusion. Additional diverse candidates from different BAME and gender backgrounds have been appointed to the board and they are “seriously addressing the issue throughout the workforce with one of the more progressive approaches we’ve seen in the UK,” she adds. As a consequence, they supported the director’s re-election for the first time this year.
Pension funds can also exert influence by publicly agitating for change – which can have an impact on a company’s image. “Companies are increasingly aware of how they’re seen,” says Bullock. “It’s becoming a factor in recruitment and retention of staff. A pension fund putting pressure on a company can make headlines, and both employees and potential employees can become aware of why this is happening.”
For those investing in pensions, there is a greater opportunity than ever to use that money for good. As millennials and generation Z are more likely to be working for longer than previous generations, the power lying in their pension could be more potent, because it’s likely to be invested for longer.
“In the past you were probably cashing in your pension by 60 or 65,” says Bullock. “Now, more and more people stay invested [for longer], and that could extend the investment period by 20 years. It could greatly increase the impact of how you invest your pension because your investment time horizon would be so much longer than in days gone by.”
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