The charge cap on workplace pension fees will have to be lifted for the industry to transition to a low carbon economy, MPs have been told.
Speaking at a Treasury Select Committee hearing this week (October 14), Huw Evans, director general of the Association of British Insurers, said one of the key issues facing the financial world in terms of green finance was the 0.75 per cent charge cap on auto-enrolment pensions.
He said: “From a policy perspective, environmental, social and governance funds are typically above the 0.75 per cent cap because they involve active management so are more expensive to run.
“As long as you have the charge cap that doesn’t allow any exceptions for ESG, then you will find it hard to shift [assets to sustainable assets].
“So there is a strong case that the charge cap needs an exception, if there is an ESG component, to allow more people who are in auto-enrolment to have the option to go above that fee.”
Steve Waygood, chief responsible investment officer at Aviva, agreed, saying it was an “elegant” idea which Aviva would support.
But minister for pensions and financial inclusion, Guy Opperman, "vehemently disagreed" with the thought that the only way to incorporate ESG strategies was through active management.
He added: "Most schemes charge well below the cap, and can already incorporate active as well as passive ESG. Government has no plans to dilute member protections by adopting the ABI’s proposal.”
Mr Waygood told MPs that helping consumers engage with their pensions would be crucial to the assets within pensions being aligned with net zero carbon targets.
He said: “When the London Stock Exchange was created in 1802, people would know what they owned.
“But the intermediation has evolved so now very few of the UK citizens understand a pension, let alone that they own the companies or that they have a vote. This financial literacy abyss needs to be addressed.”
Mr Waygood said the pensions dashboard — which has been delayed on numerous occasions since it was announced in 2016 — would be a key way to do this, but also promoted fintech as a way to “reconnect the end investor to their ownership rights”.
However, using fintech for every consumer was not financially viable for pension firms, Mr Waygood said, so the government would need to help.
Mr Evans added: “We have to overcome the very low levels of financial capability. Around 96 per cent of pension schemes through auto-enrolment are in default funds.”
He also told the members of the Treasury select committee the industry needed to lobby the government to change the Solvency II framework to help insurers invest in a wider range of sustainable and ESG assets.
Currently, the solvency regime works around asset classes so the ‘capital charge’ — the amount of cash the insurer has to hold in order to invest in a certain asset — is larger for less liquid, ‘riskier’ assets.
Mr Waygood told FTAdviser: “This system has the unintended consequence that insurers’ money is tipped into ‘old economy’ stocks, such as oil, gas and big banks.
“This is because that is the type of company in the market for corporate bonds, which are considered less risky so have less of a capital charge than ‘new’ economy, which is likely to be more aligned with the Paris agreement on climate change.”
The committee also heard how long-term assets funds could help shift assets into more sustainable stocks.
Long-term assets funds is a new structure, set to be created by the Investment Association, which would not allow investors to access their cash at a day’s notice, as is the case with other funds in the IA sectors, and instead will offer less regular liquidity.
The aim is for the fund structure to allow investors in areas such as infrastructure and renewable energy to have access to an open-ended fund structure.
Speaking to the committee, Sandra Boss, global head of investment stewardship at BlackRock, said the structure could be a “great help” to bringing private capital to some of the investments which “really needed funding” in the UK.
She said: “There is an opportunity for long-term savings, where this is a multi-decade investment. At the moment, it is very difficult for small savers and retirement savers to get access to these types of products.
“But long-term asset funds would be safe, and have the right precautions around these illiquid assets and be overseen by an investment manager.”
imogen.tew@ft.com
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