Pensions should have a wider purpose
Pension funds like to emphasise that their key goal is to provide sustainable retirement income to their members. Few would openly dispute that claim, yet many pension funds spend significant resources on addressing issues that go beyond providing pensions – for example, in their concern for climate change and socially responsible investment. Of course, it can be argued that those issues are being addressed because they will affect pension fund returns in the future.
Many argue that pension funds should steer clear of those issues entirely as they are not economic but political (and as such, outside of their investment remit).
Pension fund investment in the real economy – domestic SMEs as well as infrastructure – is a different issue and one that deserves further consideration. It has a genuine economic purpose and today many real economy investments are better than investing in global financial markets.
Some pension funds are pursuing opportunities in their regional economy in particular. One of those regionally-focused pension funds says its motive for pursuing this strategy is “making the system work”.
The idea behind the approach is that funding local private firms has a wider impact than just improving diversificaton. It potentially increases retirement income in the future but also has a more immediate social purpose. It improves economic conditions for those firms and, by extension, their employees. It is worth noting that financial support often comes with inputs in other areas such as strategic advice or improvements in transparency. Investing in global markets will always offer opportunities, but investing closer to home has the added advantage of knowing the envionment better.
Such an approach should prove successful. There is no reason why pension funds should not have an explicit focus on directly stimulating the local economy.
Similarly, pension funds should not just see themselves as return-making, liability-matching machines. They are, after all, organisations made up of individuals – just as entrepreneurs are often motivated by considerations other than money. People can be moved by more complex motives, including ethical ones.
Pension funds need not be insular organisations. Whatever the reason for their creation, they serve a social purpose – making sure that those who are too elderly or too frail do not end up living in poverty. Where possible, that social purpose should be extended to making future pensioners’ lives better today.