The Detrimental Impact of Virtue Signalling on British Pensions
It's becoming increasingly evident that virtue signalling has significantly undermined the stability of pensions in Britain, casting a shadow over the future of retirement savings for millions.
When you think about your pension, it should be a secure nest egg, providing growth and financial comfort in your later years. Unfortunately, this isn’t the reality for many people today. Whether you’re invested in a defined contribution plan or relying on a large defined benefit scheme, the grim truth is that these funds are stagnating rather than flourishing. In fact, research suggests that 90% of individuals would fare better by simply placing their retirement savings into a FTSE tracker fund rather than engaging with the complexities of workplace pension schemes.
For instance, a recent analysis highlighted that the Universities Superannuation Scheme (USS)—the largest pension scheme in Britain with £73 billion under management—has only managed to generate an annual return of a mere 1.7% over the past five years. To put this into perspective, during the same timeframe, inflation surged to 4.4%. In stark contrast, even Australia’s most poorly performing superannuation fund achieved a return of 4.6%, while its top performer soared to 11%.
So, what’s causing British pensions to lag so severely? At the core of a pension manager’s responsibilities should be the maximization of financial returns. Regrettably, many have diverted their focus, opting instead to leverage Britain’s savings to pursue environmental and social objectives as dictated by ESG (Environmental, Social, and Governance) criteria. This shift occurs without the consent or knowledge of those who trust them with their money.
The USS proudly announces its commitment to achieving Net Zero by 2050, or even sooner. They claim they will urge the companies they invest in to transition towards a low-carbon economy. However, the resources and efforts allocated to decarbonization initiatives could be far better spent on innovation and profit enhancement within those companies. Essentially, this represents a form of stealth taxation on the private sector—an insidious cost not felt on a daily basis, but one that accumulates. A seemingly minor annual underperformance of just 1% can translate into tens of thousands of pounds lost by the time you reach retirement age.
Interestingly, despite the push for Net Zero, the fossil fuel industry in Britain has thrived, with the FTSE 350 Oil, Coal, and Gas sector seeing a remarkable 70% return over the last five years. Yet, many pension savers are denied access to these lucrative returns due to green-focused pension funds like the London Pensions Fund Authority (LPFA), which instead channel investments into green infrastructure projects such as wind farms and solar energy. The performance of these green investments heavily relies on government subsidies, and the state is eager to support them to achieve its self-imposed Net Zero targets. Any funding that doesn’t come from governmental aid largely stems from pension funds that are being pressured into supporting green initiatives.
A troubling cycle has emerged, where large asset managers and government entities encourage each other to adopt policies that ultimately stifle economic growth. For example, when Rishi Sunak expressed hesitance regarding Net Zero, major asset managers rushed to reassure him of the necessity to maintain Britain's leadership in the global transition to a low-carbon economy. Furthermore, when the FCA introduced stringent new ESG requirements, rather than resisting these measures, pension managers welcomed them, emphasizing the urgency of climate action.
Another layer of complexity arises from the presence of underqualified individuals in leadership positions, often a consequence of diversity quotas. We've all encountered professionals who seem ill-equipped for their roles, and now, diversity mandates mean that pension providers and the companies they invest in may be filled with directors and staff whose qualifications aren’t solely based on merit.
Take Legal and General, for instance, the largest pension manager in Britain. They have set ambitious goals, aiming for 50% female representation among their staff by 2025, and 17% of board members to be from ethnic minority backgrounds by 2027. They don’t stop there; if a company in their portfolio fails to meet these diversity standards, they pledge to vote against them at their Annual General Meetings (AGMs).
Consider Howdens, a company known for making kitchens and consistently increasing dividends. It operates in an industry not particularly recognized for its diversity. At its latest AGM, Legal and General voted against them for not having an ethnic minority representative on their board.
These diversity targets, coupled with a lackluster acceptance of poor financial returns and excessive regulations, deter highly skilled investors from entering the pension sector, leading many to seek opportunities at boutique firms or start-ups overseas. This trend ultimately harms ordinary pension savers who rely on the expertise of talented investors to convert their savings into a sustainable retirement income.
In many cases, ESG factors—entrenched with Net Zero and diversity benchmarks—have become the default setting for pensions. Your own pension may well fall under its influence. While it is technically feasible to redirect your savings towards more profitable avenues, doing so often requires navigating through customer service that can feel less efficient than dealing with a government agency. You may receive multiple warnings regarding the risks associated with shifting your investments, yet rarely, if ever, are you informed about potential incentives.
Pension funds should not serve as extensions of governmental agendas: they must not become a captive pool of capital for state-backed projects and social initiatives. Instead, these funds ought to sever ties with ESG mandates that are contributing to widespread economic decline. Their primary focus should be unwaveringly dedicated to delivering solid financial returns for hardworking Britons.
