In recent weeks, ‘responsible capitalism’ has risen to the top of the political agenda. A cross-party consensus has emerged that shareholders must do more to tackle irresponsible corporate behaviour such as excessive top pay.

We have also entered 2012, the year of auto-enrolment: a process that will ultimately see millions of workers begin saving for a pension through the capital markets. Thirdly, we have seen the government turning to pension funds as a source of capital to fuel the economic recovery through infrastructure investment.

Put all that together, and it is clear that the way pension funds invest is no longer, “a minority sport”, but a matter of acute national concern.

UK pension funds still make up around 13% of the UK stock market – with insurance companies who provide pension products making up another 12%. It’s vital that this huge pool of capital is invested responsibly in the long-term interests of pension savers.

Unfortunately, as a report published last year by responsible investment charity FairPensions showed, current interpretations of the law may hinder this objective.

Fiduciary duties – our main legal mechanism for protecting those who entrust their money to someone else – do not apply consistently across the pensions market.

Worse, they are generally interpreted as forbidding pension funds from raising their sights beyond quarterly returns. A view which, far from protecting savers’ long term interests, may in fact be damaging to them.

Clarification of this seemingly obscure and technical area of the law could unlock positive change in a whole range of areas – supporting jobs and growth, ensuring decent pensions, and underpinning the shift to a more responsible, resilient capitalism.

The pervasive myth that fiduciary duty begins and ends with maximising returns leads many funds to neglect intangible factors – be they excessive pay or poor environmental performance – even though they may well affect the long-term returns which matter most to pension savers.

Making companies more accountable to shareholders will not be enough to tackle ‘crony capitalism’: shareholders themselves must also become more accountable to the ordinary savers whose capital they invest.

Among other things, this means much greater transparency about what is being done with our money.

At the moment, if I want to find out how my pension fund voted on Barclays’ remuneration report, they are not obliged to tell me.

Given the choice, many pension savers might well want to see their savings invested in British industry or green infrastructure. But under conventional interpretations of the law, their views are irrelevant.

This is emphatically not about hijacking pension funds’ capital to serve government ends: that is a dangerous road to go down. It is about allowing them the discretion to take a broad and enlightened view of what is in their beneficiaries’ interests, rather than prescribing an approach which may ill serve savers in the long run.

The Pensions Regulator estimates that 5-8 million people will be newly saving or saving more as a result of the 2012 auto-enrolment reforms. Many of these will be low-paid workers. There is a huge responsibility on government to ensure that these people’s savings are responsibly stewarded and deliver a decent retirement income. This means ensuring that fiduciary standards of care are applied across the pensions market.

Strathclyde Pension Fund offer an excellent example of how pension funds can make investments that add genuine, sustainable economic value for their members. It recently announced a £100 million ‘New Opportunities Fund’ to invest in job creation in Glasgow, with the proviso that it will only invest in businesses which pay the Living Wage.

But these examples are very much the exception rather than the rule.

—
This is an extract from a speech last week by Jon Cruddas on pensions reform at the House of Commons.

Reader comments

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2. DPWF

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3. DPWF

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