Can deliberative governance support pension schemes to make sustainable investments? - RSA

Can deliberative governance support pension schemes to make sustainable investments?


  • Picture of Emmeline Cooper
    Emmeline Cooper
  • Economics and Finance
  • Pensions

Emmeline Cooper, a PhD researcher from the University of Westminster, discusses how deliberation with pension scheme beneficiaries can help inform sustainable investment decisions.

Most people would rather not think about occupational pensions – an unappealing cocktail which mixes considerations of our own inevitable ageing along with personal finance. It’s a tipple which few like to savour. But the retrenchment of the state pension and longer life-expectancies have meant that occupational pensions are becoming increasingly important. The UK policy of automatic enrolment in pensions (meaning employees are automatically enrolled by default, with the option to ‘opt out’ if they choose), has led to a further 6.87 million employees taking part in workplace pension schemes by the end of 2015.

Offering more sustainable pensions

In 2015 alone, among UK eligible employees, £81.8 billion was saved into occupational pensions. In recent years, some pension scheme members have raised concerns about where their pension scheme contributions are invested, with the pressure to divest from fossil fuels a high-profile example. The investment industry describes these concerns as sustainable or responsible investing, both of which may address a range of environmental, social and governance issues, for example, climate change, poor employment conditions or excessive executive pay. As interest in environmental, social and governance issues has grown, products and services that respond to these concerns have moved from niche providers to mainstream investment institutions.

Pension schemes have a fiduciary duty to beneficiaries: does this include environmental, social and governance issues?

Pension schemes have fiduciary duties to their beneficiaries which, among others, include a duty to act loyally, prudently and with an even-handedness to all. Some pension schemes consider environmental, social and governance issues as material to (that is, having a financial impact upon) investment performance, and will consider these in their investment strategies as part of maximising the risk-adjusted return.  Climate change, for example, is increasingly seen as a material issue. Others with clear ethical positions, such as the Church of England, invest according to their principles. However, what about other issues where the evidence is more mixed, or where values are more plural? Can and should pension schemes consider such issues when investing? Or by doing so will they not be meeting their fiduciary duties and failing to meet all their beneficiaries’ ‘best interests’? The Law Commission clarified that in most circumstances, trustees may indeed consider non-financial factors if there is good reason to believe pension scheme beneficiaries share the view, and this will not risk significant financial detriment to the fund.

How can trustees be sure that beneficiaries ‘share’ the view that environmental, social and governance issues are relevant and how they should be balanced against financial return? One way would be to take a market approach so that members are able to exercise exit, and choose an occupational pension scheme with an investment strategy which meets their interest in environmental, social and governance investing - in the same way a consumer can choose an ethical bank. In the UK, this could be achieved only with reform to the occupational pensions market. Some pension schemes have been thinking along similar lines, and have developed sustainable investment pension products into which their members can opt.

New models of governance for a more sustainable future

A second approach also exists. This involves opening-up channels of communication and deliberation between pension schemes and their beneficiaries on sustainable investing. This approach would not replace the trust based governance of the trustee board but would complement it. It could include, for example, events and open meetings, discussion groups, committees or even randomly-selected beneficiary forums that involve a diversity of beneficiaries directly. Each of these can vary in scale, in who is involved, in the depth of deliberation, and in how they are connected to trustee decision-making. Although these forums might be seen by some as an unnecessary administrative burden, there are several reasons for considering this approach.  

Such deliberative spaces are particularly useful for dealing with issues which are complex and where individual preferences are either under-developed, or where there a diversity of values and perspectives. Through deliberation, participants become more informed, more engaged, and more able to give an opinion on complex issues. Deliberation (in contrast to private acts, such as voting), it is argued, encourages participants to consider not just their own but also the perspectives of others; not just their individual interests but also the interests of the collective. These considerations are helpful to discussions of sustainable investing – which asks us to examine the broader circumstances and consequences of investing. Deliberations can illustrate to trustees beneficiaries’ values and opinions towards sustainability, where there are points of consensus and where there is diversity in viewpoints. This could be a useful source of knowledge to draw upon in trustee decision-making. In addition to the knowledge gained, the close connection of governance decision-making with public deliberation can enhance the legitimacy of these decisions, putting trustee boards in a stronger position to address complex decisions.

Critics may question if these forms of deliberative governance are feasible in pension schemes, or may wonder if their claims can be fully realised. Even so, these ideas do help us critically re-consider and re-imagine how pension schemes can understand, and meet, their beneficiaries’ best interests. And forms of citizen and stakeholder deliberation are not unusual in the governance of other organisations, for example: the use of 21st Century Town Hall Meetings on public policy issues in the USA; or the widespread use of stakeholder discussions in firms. The website provides a rich resource of models, illustrating the diversity currently in use. Indeed, the RSA’s own Citizens' Economic Council provides a further example, showing how citizens can be involved in high-level economic policy discussions.

Some forward-looking pension schemes have already begun opening-up channels of communication and deliberation with their beneficiaries on these issues, and finding practical ways to bring these ideas into trust based governance. Perhaps these innovators will provide new models of governance, for a sustainable future?

Emmeline Cooper is a PhD Researcher at the University of Westminster 

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