The purpose of this paper is to explore why and how social pension funds should be introduced in the UK.
It considers the introduction of a social pension fund that retail savers could invest in as part of their defined contribution pension fund scheme to help kick-start a new social impact segment of the UK pensions market. This builds on a recommendation made by the UK Advisory Board of the Social Impact Investment Taskforce, established under the UK’s presidency of the G8. This paper will be complemented by another paper, to be produced by Big Society Capital, which will provide a detailed proposal for how such a social pension fund could be designed.
The need for social investment and Defined Contribution pensions as a source of capital
Charities and social enterprises address a huge range of complex social challenges in the UK, such as youth unemployment, rehabilitation of offenders and fuel poverty. Social investment can provide these organisations with the capital to innovate and expand their activities sustainably. In a period of continued fiscal austerity when public funding from many Government departments is set to be reduced, finding sources of private finance that can expand the activities of charities and social enterprises is crucial.
Chapter 1 explores how the UK pensions market holds vast reservoirs of capital that could be deployed to help social enterprises. By 2030, assets under management in defined contribution (DC) pension schemes are expected to be nearly £600bn.[i] Meanwhile, the number of DC savers is set to almost treble by the end of this decade. At the same time, the pensions industry (and the Government) is wrestling with the need for individuals to increase their long-term savings and the best way to engage them toward that goal. However, although there appears be significant saver interest in funds that target social outcomes, the market is not delivering products that meet this demand. A new social impact segment is needed within the UK pensions market.
How to engage key stakeholders in the UK pension market
Whilst there is a strong case to introduce social pension funds to the UK, their introduction requires a number of stakeholders to be engaged. Chapter 2 identifies a range of barriers and enablers through the investment chain that affect the development of social pension funds in the UK. On the demand for social pension funds, these include inertia displayed by individual savers; on the supply of social pension funds, these comprise risk aversion and concerns about fiduciary duty from trustees and their agents, and concerns about liquidity and scale on the part of providers and investment managers. These can be overcome, but, as Chapter 3 sets out, they require specific actions to be taken.
Recommendations: Introducing social pension funds into the UK
Drawing on the experience of France’s ‘Solidarity Investment Fund’, which has been functioning for more than a decade and has raised more than €4.8 billion, as well as evidence from behavioural economics, the report sets out proposals for how social pension funds and a broader social impact segment of the pensions industry could be developed for the UK. It proposes that:
- As in France, a hybrid fund could be established that dedicates a small proportion of its capital to social investments and a majority to investments in traditional companies that are socially responsible. This would be a route to achieving scale, liquidity and assurance on financial performance and risk profile, as well as a diversifier from traditional asset classes.
- These social pension funds could be developed by large investment companies, with the help of the UK’s social finance intermediary sector, as well as by specialist investment companies. Its introduction could be facilitated by calls from large auto-enrolment providers or employers that would stimulate the development of new funds.
- Social pension funds could become stand-alone funds that individual investors could opt into, but also could form part of default funds.
- Whilst regulatory change is largely not needed for the establishment of the funds, Government could promote their development through targeted regulatory action, such as by allowing ‘mark to model’ pricing to overcome liquidity constraints within the social element of the fund as well as to provide assurance to trustees that they are not failing in their fiduciary duty.
- As in France, the Government could also encourage the take-up of social pension funds in the UK by making it mandatory that all employers offer DC savers the option to save into such a fund through their pension scheme.
- Social pension funds could appeal to those individuals with additional capital to invest, who could be nudged into making further investments into a social pension fund when they increase their pension contributions beyond the statutory minimum.
- A roadmap of activities required to make social pension funds a reality is suggested in Chapter 4, comprising a mix of further research, industry leadership and targeted Government intervention. It suggests that by 2020, there could be tens of thousands of new social pension savers investing billions of pounds of pension funds into social pension funds.
[i] The £600bn figure is derived from: maintaining the current estimated £100bn in SIPP DC assets; an estimated £348bn of DC assets without any auto-enrolment; an additional £149bn in DC assets as a result of the roll-out of auto-enrolment. See Table 2 below for references.