It has become increasingly difficult to join a defined benefit pension scheme, with just a handful existing outside of the public sector.
However, millions of us are members of these schemes – perhaps because we are being paid a pension, because we used to work for a company that offered a scheme, or because we are still building up retirement benefits in a scheme.
One of the biggest defined benefit pension schemes in the UK is the Pension Protection Fund, which provides benefits for members of old schemes, where the employer has failed.
We tend to imagine that defined benefit schemes have a magical relationship with money – we like to think that the pensions that they are paying out now, and which they have promised to pay out in the future, don’t have anything to do with stocks and shares and property.
However, many of the schemes have large investment portfolios, which are made up of traditional, mainstream investments like shares, fixed interest stock, property and cash.
But because we don’t think of the pensions we have in these schemes in the same way as we think of our other investment-linked pensions, we tend to ignore their environmental and social impact.
The environmental and social impact of these pension schemes can be huge.
The UK’s biggest pension scheme (the Universities Superannuation Scheme) had over £60 billion of assets under management on 31st March 2018, which makes it one of the largest investment portfolios in the UK.
The pension schemes of the High Street banks, BT and the Electricity Supply companies are not much smaller.
By investing in the shares of companies, and lending them money, these pension schemes have an enormous impact on our environment and society.
Details of the investment portfolios of these pension schemes are not publicly available, with one or two exceptions. The USS does give us information about its portfolio. Back in 2019, it included:
– £463 million of shares in Royal Dutch Shell
– £395 million of shares in Roche (the pharmaceuticals company)
– £261 million of shares in Diageo, the drinks company
– £121 million of shares in Imperial Brands, the tobacco company
Not many ethical investors would be happy to hold shares in these companies.
USS is an easy target because they are open about how they invest. However, USS has taken some positive steps, lending money to wind farms and other renewable energy businesses; although it does make some questionable claims about how its 10% ownership of Heathrow airport allows it to engage with a business with such a large and expanding carbon footprint.
But the fact is that most defined benefit schemes will have similar investment portfolios to the USS. Their environmental and social impact will be similar. They may not disclose their investments publicly, but it is unlikely that their ethical stance will be different.
For many investors, their defined benefit pension scheme is their most significant asset. Ethical investors really shouldn’t be ignoring the social and environmental impact of membership.
What can you do?
– Engage with the scheme trustees, encouraging them to use their investment portfolios to make a positive impact, and to disinvest from ethically unacceptable companies.
– Offset the impact of membership of the schemes – in a similar way to carbon offset, charitable investment could be seen as a form of “ethical offset”.
– Encourage schemes to publish their most significant investment holdings, allowing members to assess the ethical credentials of their scheme.
Some people will be able to choose not to join a scheme or even to transfer out. This isn’t usually a sensible option from a financial perspective. But some people may find that the companies in which their pension fund invests contradict their moral or religious beliefs, and that membership of the scheme is an indirect way assisting businesses to thrive which go against their moral code.
Defined Benefit pension schemes could be a force for positive change, and their investment portfolios could be used to help the environment and society as a whole, particularly if members encourage trustees to adopt a more ethical investment stance.
Being a member of a defined benefit pension scheme doesn’t just give you a guaranteed income in retirement – it allows you to make a difference.
