Nico Aspinall, chief investment officer at the People’s Pension, discusses the obstacles to social investment in DC, and explains how they can be overcome.
Key points
Liquidity regulations in DC should be revisited to direct capital to social investments
There is a need for greater co-operation between parties on capital allocations
More joined-up thinking in government would help
Today, if you are one of the millions of people whose retirement savings sit in a mastertrust and you want to make social investments part of your plan, your pickings are pitifully thin.
Social investments do provide returns and can improve investment characteristics if they are treated in the right way
This is because of the inherent difficulties in accessing social investments in a defined contribution scheme.
Savers sit between a rock and a hard place
By their nature, projects that improve the lives of disadvantaged people or create housing for low income families tend to sit outside public markets. They are private, niche and illiquid.
With the focus on costs in the mastertrust sector, we see significant amounts of passive investment in listed markets. Social investment options do not feature. They are unlisted and so savers in mastertrusts sit between a rock and a hard place.
DC schemes must be able to provide daily valuations of assets and daily liquidity for members taking benefits.
The only way DC schemes can obtain social investments is through scale – so that the illiquid and private nature of the investments does not threaten valuations and liquidity – but that also means only a very small proportion of a plan can be invested this way.
There is a further issue. The designers of DC investments must view asset allocation through the lens of fiduciary duty. This means they cannot take actions to weaken the investment characteristics, their returns and expected levels of risk, to sate social consciences.
If they are reasonably confident the membership shares these values they can make a case, but in a DC scheme where engagement is low, it would be hard to put this in place. If social investments are framed as ‘giving up’ return, the game is over.
Address biases in fund and platform design
This is a misunderstanding of the sector, of course, because social investments do provide returns and can improve investment characteristics if they are treated in the right way. This is not charity, but a selection of who you want to benefit when you seek returns.
There is cause for optimism though. The Law Commission published its paper on this topic in late 2017 and the government has committed to respond in full in summer 2018. It is part of the overall plan to “harness the potential of finance as a force for good, with capital directed towards investments that build a stronger society”.
That is very welcome because we have seen a generation of governments display little consistency in their approach to long-term savings. So, what would we like to see in the policy framework?
First, the government should address biases in fund and platform design and regulations against illiquidity. A 22-year-old, unable to access their savings for more than 30 years, does not need investments structured as if they could be sold tomorrow. Pension investments are designed for the long haul and recognising this could address a significant barrier.
Extending social investments to wider DC provision
Second, it would be helpful to have a central process where central government, local government and charities can highlight their needs for social investment. It can be expensive to search for them and, given their small scale, this cost is disproportionate to the investment, eroding the investment case.
Third, more clarity on the contrast between fiduciary duties, belief in market efficiency and the role of institutions as the providers of finance for society, is needed.
The Law Commission has twice addressed this topic, but the industry has progressed little. We could do with a stronger steer in regulation towards this sector, if the government is serious about wanting this to happen.
Mastertrusts may be the best place this could be achieved in DC given their growing scale and the superior governance a trust board offers. But the government will have to demonstrate that it understands the problems in wider DC provision if it wishes to extend social investment outside of this sector.
Financial returns and social returns can be easy bedfellows – if the will is there.
Nico Aspinall is chief investment officer at The People’s Pension
