Defined contribution pension schemes should offer members the option to include social impact investments in their portfolio, a government-led taskforce has said, but consultants foresee barriers to take-up.
Impact investing is a form of responsible investment with the intention of generating social and environmental benefits alongside financial return.
Impact investment has been largely untouched because it doesn’t form part of a default fund
Damian Stancombe, Barnett Waddingham
Initiatives such as Investing 4 Growth – an initiative between five local government funds to encourage investments that benefit local communities – have raised the profile of impact investing among UK schemes, but experts predict inertia and lack of understanding will limit growth.
Earlier this year the Law Commission released guidance stating schemes could take into account both financial and non-financial concerns when examining investments.
The Social Impact Investment Taskforce, an organisation set up by the G8 nations to explore how to expand impact investing globally, published 'Impact investment: the invisible heart of markets' last month.
The taskforce's UK National Advisory Board also released a UK-focused report, in which it called for legislation compelling DC schemes to offer a “solidarity” impact investment option.
The report said: “While efforts have been made to encourage individual retail investors further, such as through the Community Shares Unit, Social Investment Tax Relief and UK Social Bond Fund, there is still a significant way to go to reach people at scale with products that they understand. Pension funds are a natural route to access individual investors at scale.”
Setting up an option for members to invest in would not be difficult in theory, said Ralph McClelland, associate director at law firm Sackers.
“Quite a lot of schemes already do offer funds that are in this space,” he said. “I don’t know if the take-up is very high.”
Damian Stancombe, partner at consultancy Barnett Waddingham, said ethical funds tend to have low use because most members of schemes will stay in the default option.
“Impact investment has been largely untouched because it doesn’t form part of a default fund,” he said, adding that the comparatively small size of options outside the default may increase their risk. Lack of investment understanding among members has also been cited as a reason for low take-up.
However, Stancombe added that examining investments should only form a small portion of the attention members dedicate to their fund, when compared with other aspects such as contributions.
“If you looked at your [pension pot] once a year for 30 minutes, 29 of those minutes should be about affordability and one minute would be about investment.”
The report stated: “UK pension funds are… genuinely interested in social impact investing, according to a survey of opinion leaders in the industry about attitudes towards social impact investment.”
It continued: “The survey revealed that 23 per cent already include social impact investing in their current portfolio. Although most of these investments are in very long-established domain areas of social housing and green energy.”
However, the report warned that awareness and expertise were lacking among large institutional investors.
Simon Howard, chief executive of sustainable investment trade body UKSIF, welcomed the recommendation, saying there was a growing momentum to offer a wider range of options to DC members, including those that reflect members' values.
He added: "This all accords with the trend of government action to let people take more control of their pension assets. As such the recommendation that DC providers offer something like a solidarity option seems sensible and timely.”
