There are no legal or regulatory barriers to pension funds, whether defined contribution or defined benefit, making investments that support the wider social good, according to a new report by the UK’s Law Commission. Current barriers identified by the Commission were, in most cases, structural and behavioural rather than legal or regulatory, the report concluded.

Barriers are structural and behavioural

The Law Commission was asked by the government in November last year look at how far pension schemes may or should consider issues of social impact when making investment decisions  and to identify any legal or regulatory barriers. The Commission’s report sets out options for reform where it identified steps to address barriers and where the law could be improved so as to reduce the impact of these barriers. The Commission said these recommendations were identified in its 2014 report which examined fiduciary duties and had been updated in light of the current pensions landscape.

The Commission noted the growth of defined contribution schemes with the investments in these schemes now increasing more rapidly with the introduction by the government in 2012 of auto-enrolment. The Commission said that by 2030 the total funds invested was expected to reach around £1.68 trillion.

While defined benefit schemes in the UK did invest in property and infrastructure projects that could boost the wider society defined contribution schemes were not doing so. The report said  less than 5% of defined contribution funds were invested in property and the Law Commission had not found any examples of infrastructure investment by UK defined contribution pension schemes.

Law Commissioner Stephen Lewis said: “Defined contribution pension schemes will be investing billions of pounds over the next decade, and it’s only right that they seek to get the best returns for their clients. But it is possible to do well and do good at the same time and we’ve seen billions invested in infrastructure in places like Australia delivering for savers and society.

“In the UK there seem to be some misconceptions as to whether this is allowed for these pension schemes. We’re clear, legally, there’s nothing to stop them doing the same.”

The Law Commission recommended that for trust-based pensions, the Occupational Pension Schemes (Investment) Regulations 2005 should be amended so that the reference to “social, environmental or ethical considerations” is changed so that it accurately reflected the distinction between financial factors and non-financial factors and that there should be a requirement that the statement of investment principles produced by trustees should state trustees’ policy (if any) on stewardship.

IGCs – more governance reporting needed

For contract-based pensions, the Law Commission believes that the Financial Conduct Authority (FCA)  should require schemes’ independent governance committees to report on a firm’s policies in relation to evaluating the long-term risks of an investment, including relating to corporate governance or environmental or social impact; considering members’ ethical and other concerns; and stewardship.

The Commission also recommended that the FCA should issue guidance for contract-based pension providers on financial and non-financial factors, to follow the guidance for trust-based schemes given by The Pensions Regulator. Additionally the report suggested options for reform in respect of investment in social enterprises (such as charities and community interest companies); investment in property and infrastructure; and encouraging savers to engage more actively with their pensions.

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