Like others in the industry, Weeks also sees affordable housing investments as a way of encouraging millennials to close their own personal saving gaps by opting to raise their pension contributions. “We need to attract younger people to invest in pension funds from an early age and if they are not enthused they will not do it,” he says.
The above DC Investment Forum survey made the same link and one can pick up almost any survey of millennials to find out they value a more ethical role for business than previous generations. A Deloitte survey from 2016 said they “want businesses to focus more on people (employees, customers, and society), products, and purpose – and less on profits”.
Such member endorsement can be one legal defence in deliberately seeking to invest in impact investments. Guidance from The Pensions Regualtor says that trustees have to take into account the demographics of their scheme when choosing their default fund. On this basis, a fund with predominantly younger members should not be overly focused on maximising short-term returns.
As the Law Commission states: “Investment strategies which aim to produce higher returns in the short-term but may endanger the financial viability of the scheme in the long-term, will have a disproportionate impact on younger members.”
Tony Filbin, a professional trustee with Capital Cranfield and a member of several auto-enrolment scheme trustee boards, says that the legal position of more progressive investment policies can be defended by clearly communicating to members.
“Providing our strategy is thought through, proportionate, evaluated and monitored, changed where appropriate and communicated effectively, you have done all you can and there is room there for investments in things such as affordable housing in a multi-asset environment,” he says.
He adds that along with such communication, members should always be given the option for an alternative fund whose only focus is on maximising profit without any regard for the ESG consequences of such investments. He caveats this by stating that any default that does go into new areas needed a higher level of oversight and checks to justify its policy.
Of course, for the time being, the constraints of scale, suitable products and the charge cap limit the ability of DC schemes to invest in social impact investments that may appeal to younger members.
Iain Richards, head of responsible investment EMEA at Columbia Threadneedle, cites these limitations, but also sees herd mentality at play. “When pension funds are uncertain of what is required they will go for the default option,” he says. “You get people like us who are willing to innovate, but the majority of the market do not follow until they feel like it is a success and someone else has proven it and then they will jump on the bandwagon.”
He adds most DC funds follow their advisers’ advice and that few such advisers are being innovative in this space. He sees the biggest hope for the sector as the example that is likely to be set by the new combined local government pension funds in 2018, which are being created partly to increase their scope for infrastructure investment.
