Pensions: Invest in our future, not the past

Dr Neil Jennings, Partnership Development Manager at the Grantham Institute, takes a look at the USS pensions scheme and considers how you can take more control of your pension investments.

[Last Updated 10/03/2022 with information about USS changes occuring from 1 April 2022 – see foot]

If you could choose where your pension was invested what would you go for? Tobacco companies maybe? I suspect not. But, if you have a USS pension (or potentially any other pension), that sector is likely to have benefited from your retirement funds.

I joined the USS pension scheme in March and, having worked here for a few months, thought it was worth checking where my pension investments were going. I wasn’t particularly pleased with the outcome!

If you don’t take proactive steps, any top-up pension contributions will automatically be invested in their ‘Default Lifestyle’ option. This option invests across a number of funds, some of which hold investments in tobacco and fossil fuel companies. For example, around 13% of the investments held by BlackRock Aquila Connect UK Equity are currently in fossil fuel companies, while 3.9% are in tobacco companies (on 31 Aug 2018).

While I personally agree with divestment from fossil fuels (as do the Republic of Ireland and the city of New York), I appreciate the argument for fossil fuel divestment is nuanced, but surely there can’t be any excuse for investing in tobacco companies? Last time I checked, the link between smoking and lung cancer was clear, so it’s staggering to see that, as of 30 September 2017, British American Tobacco were the 21^st most-held equity in the USS pension scheme, with £215 million worth of investments.

How to take more control of your pension investments

The good news is that you can take direct steps to invest more ethically via your USS pension – log into ‘My USS’ and select the ‘Ethical Lifestyle’ option from the ‘Do it for me’ section. You can also select ethical funds within the ‘Let me do it’ option – it takes about 2 minutes to do once you’ve logged in.

This will cover any top-up money you pay into your pension (and pension contributions on any earnings above £55,000) and will avoid companies involved with fossil fuels, tobacco, the arms trade, gambling and pornography.

It won’t however cover the ‘defined benefit’ part of your pension which will probably make up the majority of your pension – that will require more substantial changes in USS’ investment policy (and will likely be a blog for another day).

Why is the ethical fund not the default option?

Having a separate ethical fund implies that the current default fund is, by definition, unethical. I’m sure that if USS pension holders were asked what they would prefer, the majority would opt for the ethical option so surely USS should make it the default option?

One argument against making the ethical fund the default option might be that it would offer a poorer rate of return. However, a quick look at the performance of the ‘Ethical Moderate Lifestyle’ fund and the ‘USS Moderate Growth Fund’ suggests that, over the last 12 months, the ethical fund has outperformed its counterpart by around 2%.

Jeremy Grantham, Founder and Chief Investment Strategist at GMO and founder of The Grantham Foundation for the Protection of the Environment, recently highlighted that divesting from any one sector, like fossil fuels, makes virtually no difference to the overall return on investment so why not make the most ethical choice the default option?

Obviously previous performance isn’t necessarily a guide to future success, but investing in companies that are more likely to appreciate the triple-bottom line (of economic-social-environmental impacts) surely increases the chance of making positive long-term investments? I’m sure that most people would also be happy that their pension wasn’t propping up companies whose business model or product they fundamentally object to.

Encouraging change in the wider ‘defined benefit’ part of how USS invests should be a priority – but at least in the meantime we can make a small change to any top-up investments. As with any information about pensions, please don’t take my actions as a formal recommendation, but rather as something you may not be aware of where you can make a small change if you wish.

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Update 10/03/2022

The recent changes to USS includes a reduction in the salary threshold at which contributions go into the ‘Investment Builder’ (the defined contribution part of USS) rather than into the ‘Retirement Income Builder’ (the defined benefit part of USS). From 1^st April 2022, that threshold is changing from £59,883.65 to £40,000 so many USS members will have received an e-mail (mine came yesterday) with details of how the change affects you. If you do nothing, pension contributions on salary over £40,000 will go into the ‘USS Default Lifestyle Option fund’. By logging into your ‘My USS’ account, you also have the ability to choose where those contributions are invested. Options include an Ethical Fund and a Sharia Fund, for example. Some details of the previous performance of the funds you can choose from are here. As with the original blog, please don’t this as a formal recommendation, but rather as something you may not be aware of which you may wish to consider.

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