'Social' pension fund could boost investment in charities and social enterprises, says report

Published by social investment bank Big Society Capital and the Social Market Foundation, an independent think tank; the report recommends the creation of a 'social pension fund' that DC schemes could invest in (28-page / 886KB PDF). This could operate as a hybrid fund, dedicating a small proportion of its capital to social investments and the majority to investments in traditional companies that are socially responsible in order to minimise risk, according to the report's authors.

The new fund could draw from the experience of the Solidarity Investment Fund in France, which has been functioning for more than a decade and has raised more than €4.6 billion, according to the report's authors. Although creating the new fund would not require major regulatory change, the authors recommended that the government take action to promote any new fund and encourage saving into it.

One of the authors of the report, Nigel Keohane of the Social Market Foundation, said that the creation of such a pension fund could encourage more people to save towards retirement, as well as providing a much-needed source of funding to charities and social enterprises.

"Pension funds comprise huge reservoirs of capital," he said. "Putting these to productive use within the social sector has never been more important, given further reductions in government funding. But with people increasingly wanted to see positive social as well as financial returns, this could also be a route to encouraging people to save and creating the savings culture that the chancellor has called for."

An estimated 16 million people will have saved £600bn into DC pension schemes by 2030 due to the UK government's automatic enrolment programme, according to the report; making the potential for investment from pension funds "huge". Projects including social housing, rehabilitation initiatives and environmental schemes could benefit, the report said.

According to a survey by the DC Investment Forum, cited by the report, 44% of employees would rather that their employer chose a pension provider that invested in social projects even if it reduced the potential returns from their investments. However, concerns about liquidity and scale among providers and investment managers; about the risks of social investments and fiduciary duty among trustees and their agents; and saver inertia presented considerable potential barriers to establishing such a fund, according to the report.

A model similar to that already operated in France would go some way towards addressing these risks, by ensuring that 90% of the funds under management went towards investment in 'traditional' companies that had been "ethically screened", according to the report. The government could also legislate to encourage use of the fund, for example by allowing 'mark to model' pricing to overcome liquidity constraints within the social element of the scheme and by making it compulsory for employers to give DC savers the option to save into the social fund.

According to the report, social pension funds could be developed by large investment companies with assistance from existing social finance intermediaries, as well as by "specialist investment companies". The 'hybrid' approach would create "a route to achieving scale, liquidity and assurance on financial performance and risk profile, as well as a diversifier from traditional asset classes", it said.