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‘Why is my pension being politicised?’: all retirement pots to go green, Government warns

·3-min read
Green race - TMG
Green race - TMG

Trillions of pounds in pension funds will be shoehorned into “green” and “ethical” investments as the Government plans to employ savers’ hard-earned retirement money to “save the planet”.

However, higher fees, limited investment options and the potential for share price bubbles could hit the future value of pension pots, experts have warned.

Pension providers have started moving retirement pots without consultation. Paul Darrow, who works for the City watchdog, the Financial Conduct Authority, said he was “perturbed” that his pension was being transferred to carbon-free and “socially responsible” investments.

Mr Darrow, whose name has been changed, said: “I’m worried it has compromised the long-term growth of our pensions for a warm, fuzzy feeling in the managers’ bellies. The issues of the world cannot be solved by a pension or two, so why is mine part of this experiment?”

He said the political world had spilt over into the financial one and he was “disturbed” that his pension was targeting social change rather than flat-out growth.

Pension providers have moved money ahead of forthcoming rules enforced by the Government. From October, all pension schemes with more than £5bn will have to assess what climate change means for their scheme and report on the climate risk of their investments.

Guy Opperman, the pensions minister, said: “We have put climate risk at the heart of pension decision-making. This will benefit savers, the jobs market and, crucially, the planet.” However, evidence that such moves will benefit savers is limited.

The top 10 most popular ethical funds held in personal pensions have returned less than the top 10 traditional funds over one, three and five years, data from Interactive Investor, the fund shop, showed, although this was skewed by the large returns generated by Scottish Mortgage investment trust and the Baillie Gifford American fund.

In addition, the most popular ethical funds, also known as socially responsible, “ESG” or sustainable, cost 0.3 percentage points more than traditional ones on average. This could push up how much investors pay. Results have always been mixed. Such funds returned nearly twice as much as traditional funds last year, with an average return of 10pc against 5.3pc, figures from Morningstar, a data provider, showed. Traditional funds have grown more in 2021, however.

Dzmitry Lipski of Interactive Investor said: “Funds with strong environmental and social standards can do better, but investors must scratch under the surface before getting carried away. Some, for example, might simply have avoided oil stocks when they fell last year.”

There is also a risk that so much money being forced into ESG or sustainable stocks will inflate the value of their shares. DIY investors and wealth managers added £12bn to ethical funds last year, according to the Investment Association, a trade body. John Teahan of RWC Partners, a fund manager, said this enormous flow of money had driven stock prices to extremes and future returns could be poor.

He said: “There is crowding in the stocks that score really well on sustainability.” Mr Teahan, who invests globally, said it was important to account for such metrics, not just for ethical reasons but because they could influence share prices.

Tony Burdon of Make My Money Matter, a campaign group, said 28 pension funds with £500bn in assets had committed to be “net zero” – a measure of being green. He said: “They aren’t doing it because they are ‘woke’, they are doing it because they will lose money if they continue to invest as they are.”

A spokesman for the FCA said the watchdog believed the risks associated with climate change should be taken into account to protect pension outcomes but savers had been given alternatives to the default fund.

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