EUROPE - The concept of responsible investment is likely to become a component of European pension fund strategy in the long term providing investors can better define what criteria they wish to apply to the investment strategy, according to a pensions expert.

Trevor Cook, founder of Specialist Pension Services and nominated this year for the Outstanding Industry Contribution Award at last night's IPE Awards, said while responsible investment (RI) strategies at pension funds are "exceptions rather than the rule", the likelihood is that political and economic development will eventually require funds to take the concept seriously.

"I do think there will be an increasing challenge from the environment, but many pension funds are not really thinking about the impact of climate change," said Cook.

"You have to divorce the social niceties from the need to think of the environment. SRI suffers from the fact that people lump too many things together. In the short term, SRI won't solve the problem of environmental change. But long term, if you do things that will help the environment you are probably going to make money out of it, because this is the way the world will have to go. And those who lead will gain the most. If the funds can invest a little bit more time, they will gain from it," he added.

Cook said he felt the slow growth of RI was one positive development during the economic crisis. But more work is still needed to restore confidence in pension fund strategy and raise returns.

"Whilst pension funds are about generating a long-term gain, the long term is made up of short-term gains. They can't afford to take the pain and this presents a real challenge for pension funds. Some of the pension funds, interestingly, that had led thinking, have been caught out. Perhaps they overestimated the benefits of diversification. They looked at what happened in times of good, but not what will happen when times are bad.

"There is a fair chance that because equities were hit badly there is the possibility they will perform quite well in the next decade, but there is no guarantee. It is going to take a while to rebuild profitability. Liabilities are growing at a faster rate than assets are able to grow, and it is difficult to know when that will abate."

He also believes the public needs to be better engaged in a discussion about retirement options for the future and how the funding pressures on all stakeholders - employees, employers and the government - could be managed.

"There is a debate to be had on what exactly is needed from pension funds. There are an awful lot of people who are retired from their main jobs but not retired altogether. We could do with a more flexible approach to benefits, allowing some money to be taken out and the remainder to build growth," added Cook.