The pensions industry could do more to channel capital towards impact investments, such as marketing more sustainable and impact-style investments to younger savers in defined contribution schemes, according to a wide-ranging report published this week.
The “Wei Forward Report II” – commissioned by impact VC firm Future Planet Capital – presents a shopping list of measures that the report authors believe will “unleash capital from institutional investors and scale up impactful investing to solve global issues of climate change, education, health, security and sustainable growth”.
One of the many measures involves targeting “specific demographics within pensions”, the report states. While allocations from pensions that are close to maturity, particularly historic final salary schemes, will be risk averse, “those marketed towards younger millennials and ‘Generation Z’ present an opportunity for more sustainable and impactful investing as part of their defined contributions”.
Lord Wei of Shoreditch, a member of the UK’s House of Lords and a serial social entrepreneur, told New Private Markets that there is in opportunity “to engage the millennials and ‘Gen Z’ more”. These cohorts are generally considered to be those born between the early 1980s and early 2010s.
“I think the priorities of the younger generation, and the time horizons they have, are different from those who are just about to retire […] I don’t see enough products being developed in the pension industry [aimed] at that very new kind of customer or saver.”
The 110-page report outlines 38 recommendations aimed at various different stakeholder groups, including regulators, politicians, fund managers and institutional investors.
Among these recommendations is a call for pension funds and other institutional investors to upskill and get comfortable with illiquid investments and impact-orientated investments. Referring to local government pension schemes, Lord Wei said the first priority should be to skill up, particularly at the investment committee stage: “Have you got a trustee … someone who knows about this space? Someone who knows about renewables?”
Alongside the upskilling required, there is also a need for a shift in attitude among some pensions, which have “a perception or a culture of extreme risk aversion”, said Douglas Hansen-Luke, executive chairman of Future Planet Capital; they have a notion that “they will be penalised if they invest in high risk innovation or impact and they don’t immediately get a return. Whereas, if they lose money investing in gilts or government treasuries, they are losing money in the same way as everyone else and that’s perfectly acceptable”.
Sovereign Wealth Funds could play a role in helping regulated entities like pensions and insurers to mobilise capital to riskier impact-oriented investments. They could do this by providing “a mechanism that underwrites part of the impact and ESG-related income of pension funds and insurers, so that regulators can relax rules such as Solvency II for such purposes without concerns that this would increase systemic risk”. SWFs could be compensated for the guarantees, which could be secured against the underlying assets.
Insurance companies themselves could set aside profits to be put into a “joint industry-wide foundation”, established to feed capital into alternatives such as venture and private equity.
The previous iteration of the report was issued in January 2022.