Saving for the long-term: Engaging pension investors by enabling them to invest in society

By Simon Rowell, Big Society Capital

It is a time of unprecedented change in pensions. Auto-enrolment creating millions of new pension savers, there will be £600bn in defined contribution schemes by 2030 and Government has ambitions to create a savings culture. However, current experience suggests that this will be hampered unless individual savers can meaningfully understand and engage with their savings.

The number of savers choosing default pensions remain stubbornly high – for NEST, 99% of savers remain within the default fund. The expected ten million new auto-enrolment savers have no prior experience of long-term pension products. Millennials are interested in knowing more about what their investments actually do, but providers are slow to provide these products and information. Finding new ways of engaging savers to care about their long-term savings is vital.

Showing how (at least some) of their pensions can be used to help solve social issues that they can identify with and care about can help. A new type of investment exists that enables investors to invest in a range of social issues, such as social housing, rehabilitation of former prisoners and environmental initiatives. This ‘social investment’ is nascent but already measures at hundreds of millions of pounds per year, and invests directly into charities and social enterprises, and across a range of vehicles from community shares to charity bonds to social impact bonds.

It appeals because it tells individuals not just about the financial return, but report on how they’ve impacted other people’s lives through their investments. Social issues do matter to investors’ views of their pensions too – 77% prefer a social than conventional fund, and 44% still did even with a smaller return. But the current pension system is failing to deliver any products that meet these individual needs.

Good Pensions, released today by Social Market Foundation and Big Society Capital, suggests that there is a strong case for action in establishing social pension funds in the UK. Barriers exist, such as inertia and concerns about liquidity and scale. However, we can look to the example set by France, with the ‘Solidarity Investment Fund’ for a model that works to overcome these barriers. This model provides for a mix of investment of 10% into charities and social enterprises dealing directly with social issues, and 90% into listed companies that are robustly ethically screened. The model has raised €4.6bn so far and appealed to a million individual investors.

The scale of social challenges currently facing the UK and the dramatic increase in long-term pension assets suggest this has big potential. This means we don’t simply looking for a new fund but the establishment of a new social impact segment of the UK pensions market.

To do this, the pensions industry should lead from the front and start to develop social pension funds. Investment managers can work to establish new products and corporate employers and auto-enrolment providers can call for social pension funds that would help them better engage with their employees and savers. Government can develop a series of nudges and incentives to help drive uptake.

Putting social causes at the heart of the pensions offer will provide an important new way of engaging savers needed at this time of change. It will provide a strong social motivation to save for retirement, but also help create a society that people want to retire in.


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