Will post-Brexit pensions be driven by purpose or profit?
Big questions for the City to answer
In a little over five months, the UK will begin to stretch and sever its tethers with European regulation, and with it the conduct of UK Financial Services and UK Asset Management.
Is the City facing into a more purposeful future driven by greater transition to sustainable incomes for its populous, or a new panacea of deregulation to compete globally?
Direction needs momentum, which is contingent on politics and trade deals. Indeed, many hope the UK might emerge as a fiduciary leader; yet the certainty of whether the UK deregulates or gold-plates in a post-lockdown-post-Brexit world is capricious. For example, the key parts of the UK pension model are being rapidly aligned (at least in principle) to a more sustainable model, including"
- An increasing sense of big society and purpose for pensions. This has crystallised around the Make my Money Matter initiative by Richard Curtis and Mark Carney. The new campaign asserts that 'the effect of where you invest your pension is 27 times more powerful than any other decision you make.'
- Greater clarity of provider duty of care. In 2018 the Law Commission had already connected fiduciary responsibility and sustainability for pensions. This drove a series of reviews by DWP, the Pension Regulator, PRA and lastly the FCA through 2018-2019 and a new responsible investment framework from the IA.
- Sharper focus on transparency, data and reporting. The fact we are in the later stages of adopting new reporting under the Task Force Climate-related Financial Disclosures (TCFD) simply means there is both clear public awareness and detailed substance for; asset owners, fund managers and the companies they invest.
- Linking sustainability to systemic stability. The Bank of England Climate Hub had already been increasing its volume that 'climate risk' is a risk to prudential firms. Any bias towards sustainable factors has a direct bearing on prudential regulation and can change the shape of the economy.
- Fintech to cut through member remoteness and apathy. For example, the Tumelo application allows members to see the actual underlying companies held by their pension, their precise exposure as well as allowing members to express preferences on key issues and voting, which can be aggregated back to decision makers.
- Advice process becoming better conjoined with sustainability. Advisers are now updating their suitability processes with clients to account for sustainable and ESG preferences. This was introduced through MiFID II (known as PROD in the UK) and will drive much-needed adviser engagement.
- Sharpening of fund classifications and taxonomy. Fund managers are being consulted on further MiFID II updates by the EU regulator, ESMA, on the definition and funds as 'sustainable' that followed a high level EU review. This will sharpen up which funds are deemed sustainable and will address some of the greenwashing we have seen of late.
However, much of this activity was encouraged within the EU. As the UK turns away from EU federalism, and rule or law, then the question is: where does it turn to?
With frosty China on one side and US President Donald Trump's 'Murica' on the other, the UK will have to pick a side and be ready for the consequences. This inescapable truth will likely gravitate future policy.
The real answer is whether the City seeks to compete as a global capital hub (as it does today) or better serve the needs of its own populous towards a more sustainable retirement.
Purpose or profit? The looming post-Covid-19 bill may just tip the balance in the Treasury.
Contrary to a utopian and somewhat greenwashed City view; rebuilding a new shiny more purposeful economy may on balance become subordinated by a need for inward investment, profit and tax receipts.
To achieve both purpose and profit will be difficult but should be the priority for every boardroom.
JB Beckett is an iNED and author of #newfundorder
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