Pension funds and asset managers should focus more on their role of providing retirement income and less on political questions. Indeed, it would be best if the pensions industry ditched entirely what has become known as ESG (environmental, social and governance).
The focus on ESG within the pensions industry is astounding. There are inevitably big debates about climate change, sustainability, child welfare, human rights, divesting from Israeli firms and much more. No doubt, such discussions make participants feel good but they should consider their negative consequences.
For a start, they seem to have forgotten that most people still receive a meagre retirement income. For example, a recent study of the British market by Aviva estimated that the current typical saving and investment is only £53,793 (€71,900, excluding the value of their home). That would deliver income of between £3,117 a year if an annuity is bought, or £3,635 each year if invested in a drawdown plan over 25 years. On top of a basic state pension of up to £115.95 a week that amounts to a total weekly income of perhaps £185 per person.
Naturally such figures should be put into perspective. The basic state pension in Britain is lower than in many countries. The estimate is also an average. Relatively affluent individuals do much better but many people subsist on a bare minimum. The aspiration should be that everyone has a reasonable retirement income.
Not that the pensions industry is primarily responsible for the low level of payouts. Pension levels depend fundamentally on the general level of prosperity. Any payout is ultimately derived from an economy’s current output. When people invest for retirement they do not build up a stock of goods and services for future consumption. In essence, they get a claim on economic production once they have retired.
This points to one reason why ESG is problematic. Its environmental preoccupations lead to a curbing of economic growth. For example, the discussion of climate change often leads to the conclusion that consumption should be curtailed. Yet it is rising prosperity that provides the possibility of better pension payouts for all. Similarly greens forget that coal power can be enormously beneficial to poorer countries in particular.
ESG is also fundamentally undemocratic. Political topics should be debated in the public realm in a free society and not be restricted to the relatively narrow world of financial institutions, public officials and campaigning groups.
The plaudits given to Mark Carney, the governor of the Bank of England, for his comments on climate change typify this undemocratic tendency. An unelected technocrat should not be using his position to make public statements on such matters.
Political discussions belong in the sphere of politics rather than inside the pensions industry.