10 Oct 2017
Could a Social Pension product help engage DC savers?
Jeremy Rogers, Chief Investment Officer of Big Society Capital explores the future direction of DC pensions.
Last week I was invited to join a panel at Legal & General’s Defined Contribution (DC) pensions conference, chaired by Simon Chinnery, exploring the future direction of DC pensions. My fellow panellists had innovative products that were available to DC savers now. The Legal & General Future World Fund uses factor and climate change weighting to provide an index portfolio targeted around the low carbon economy. The Partners Group Generation Fund makes the potential excess returns of private equity available to DC savers for the first time.
I was asked to speak on a product that doesn’t yet exist, but we see increasing demand for, a Social Pension. Recent surveys by Barclays and Ethex have suggested over half of savers are interested in having investments that create positive social impact. In France they have developed “Fonds Solidaires”, which target social projects and have raised Eur 7bn from over a million savers.
We are exploring with Legal and General whether it is possible to develop a similar product for UK DC Pension savers. Legal and General has a longstanding interest in driving positive investment in the UK. The organisation I work for, Big Society Capital, has committed over £1bn to social investments in the UK so far, alongside a number of institutional co-investors.
On the panel I gave some examples of our investments:
Homelessness is a growing problem in the UK, with tens of thousands of families in temporary and expensive accommodation. We have invested in the Resonance’s Real Lettings Fund, which works with the charity St Mungo’s to buy properties and provide transitional accommodation and support. The fund receives its income from housing benefit and aims to help over 1000 people out of homelessness.
There are now 850,000 dementia sufferers in the UK, many of them cared for at home by relatives. James Ashwell’s experience looking after his mum, and the lack of available products, led to him working with Bridges Fund Management to set up Unforgettable. We have invested to grow the business as an online market place for dementia products and advice, and it has now had over a million users.
We also invest in local projects around the country. Ecodynamic is a social business installing wind turbines in geographical areas where fuel poverty is an increasing problem. These community energy projects provide green energy and consistent revenue to support local projects. Investors are repaid from revenues from feed in tariffs generated by wind turbines.
A pension trustee asked me on the panel “How on earth do you invest into charities?” The examples above show that what we invest in is not hugely different from other businesses, focused on future cash flow, but targeting both financial and social returns. These are in areas such as property, renewable energy and direct lending – and are likely to behave differently from traditional areas such as equities therefore providing diversification benefits.
On the panel we also discussed the significant challenge of low engagement of DC pension savers. Younger pension scheme members often feel their pension is separate and distant from their lives, as a consequence, they are disengaged and usually don’t save much or early enough, leading to poorer financial outcomes in later life.
A question we are interested in exploring is whether investing in social businesses could engage members to save more and earlier. We are already seeing from private bank co-investors that social investments may be 1% of a portfolio but become 50% of the conversation. Learnings from solidarity funds in France suggests employees in these funds are more engaged in where their money is being invested and how their money is being used to create impact.
We see the project to develop a Social Pension product in the UK as a collaborative one, and have written research on what we think might be needed. We see an increasing amount of interesting charity and social enterprise projects that require investment, and an increasing client interest in investing for social impact. We think the time has come to launch the first Social Pension products, and if you are interested in helping make them happen do get in touch.
Article by Jeremy Rogers, Chief Investment Officer of Big Society Capital