From Pension Fund Capitalism to Pension Fund Socialism?

By Adam Peggs

Pension funds are talked about too little by the left. While the subject is often not the most interesting, or the most obviously salient, the UK’s private pensions account for a huge part of the financial system. UK pension funds manage assets amounting to some 135% of GDP and in 2017-18 alone £28 billion of savings were deposited into pension funds. In this context, the practices of pension funds and their role in the economy are of key importance. Given their prominent position within Britain’s financial sector, and the sector’s large size and crucial importance in both the national and global economy, questions of ownership and control of pension funds have been significantly under-discussed.

Far deeper than this, Britain’s pension funds are failing to meet social needs. In no area more than the environment is this more clearly the case. Local government pension schemes alone have almost £10bn invested in fossil fuels (72% of local authority schemes) – and they are from unique. Almost all private sector pension schemes are invested in coal, oil or gas.

The problems with the UK’s modern pension system stretch far beyond the environmental implications though – even if it is this aspect which is the most pressing and existential. The £3 trillion saved in pensions are invested in a range of ‘unethical’ practices and generate their returns from low paid workers the world over. And it is now relatively well established in the mainstream that pension fund managers, as the managers of huge volumes of investment, have been absolutely implicated in the eye-watering growth of corporate executive pay.

The unaccountable behaviour of pension funds has also been fuelling a financial bubble that puts Britain and other countries at substantial risk of a new financial crisis somewhere down the line. As pension funds look for risk-free growth and move into new asset classes, they appear to be significantly increasing the risk to the financial system. As pension funds have become more and more bound up with the rest of the financial system, the chance increases that pensions could either trigger or be caught up in a financial crisis. Almost needless to say, this could wreak immense damage destroying livelihoods and retirement savings. 

Even beyond these issues, the reality is that control of investment, or even its broad direction, is out of the reach of the public at large. This may come as a surprise to those who had expected the rise of large pension funds to transform ownership of the economy and control of investment. This ‘worker’s capital’ has expanded substantially over the last few decades but without corresponding changes in control of the economy.

Recent years have sparked a renewed discussion of public sector banks and mutual banks as well as regulatory and tax reform of the financial sector, yet pension funds have received comparatively little attention in this discussion.

Since the Second World War pensions in the UK have largely been provided by the private sector through collective investment funds. Craig Berry writes, “As these schemes matured, and their early members reached their full earnings potential, their size, and therefore capital market presence, led Gordon Clark (2000) to herald the age of ‘pension fund capitalism’.” However, over the last few decades this picture has significantly changed. These schemes offered a ‘defined benefit’ and so, as Berry notes, most individuals did not “experience them” as “intimately connected to capital markets” despite this being the case.

In the 1980s, the Thatcher government began to incentivise a shift to greater levels of private pension provision. This followed on from a comparable shift in Augusto Pinochet’s Chile in the late 1970s, which had been the first country to move toward a more private-oriented pension system. This involved moving away from top-ups to the state pension and toward encouragement of participation in private pension schemes. The aim was to discourage ‘dependency’ on state benefits and create “a nation of individual investor capitalists”, one of the central aspects of Thatcherism’s vision of a popular capitalism.

You could call this pension fund capitalism. Despite this growth in capital owned by members of the working population, control of this capital has remained highly centralised in the hands of a small number of pension fund managers.

This was followed over the last twenty or so years by a shift to defined contribution pension schemes, in which pensions operate as individual investments. This is based on the level of contribution into the pension pot and the size of returns on the investment, rather than offering a set benefit based on factors such as years of service. For most people, defined contribution systems will offer substantially worse benefits, unless an individual is seeking to retire early or plans to retire late and cash in on the benefits of a larger return on the investment.

Further, defined benefit pensions do not involve the worker and do not bear the risk of the investment. Given the systemic risks to the financial sector mentioned earlier, this means that the savings of those in defined contribution schemes are likely to be considerably less secure.  These reasons are why it has been crucial to see the left standing with higher education workers against the attempt to close off the defined contribution element of their pension scheme and to support other workers in similar struggles in other sectors.

More recent reforms have continued to reshape the pensions system in this country. Under the 2010-15 Coalition government in particular, reforms creating a ‘single tier’ state pension and introducing automatic enrolment have dramatically increased the number of people saving into a private pension scheme. This number stood at 10.4 million in 2017-18. While many workers remain left out of occupational pension schemes, some 6.3 million, according to the TUC, private pension schemes have increasingly become a key part of our working lives – with vast volumes of employee savings now invested in the financial sector. What happens with these savings and for what purpose, already an important economic question, has become increasingly salient.

Pension Funds and Investment

With most pension funds invested in carbon-intensive activities and billions invested in fossil fuels, the UK’s pensions are currently bound up with the climate crisis. In a sample of 15 funds across the OECD, pension funds were invested in at least €79 billion in fossil fuel assets. For the OECD as a whole, this may amount to as much as €828 billion of investments in fossil fuels.

Not only is this fuelling the climate crisis, it represents a secondary problem. As time passes, the risk of these funds being devalued, as the worth of fossil fuels decline, rises. Divestment further down the line will likely increase this risk.

Some funds are beginning to take the problem more seriously. Last year, the National Employment and Savings Trust (NEST) announced plans to move away from fossil fuels, with divestment from a major holding in coal to be completed by August 2020. The plans do not appear to be a comprehensive divestment, with NEST retaining investments in fossil fuel companies.

Across the sector, divestment, where it has taken place, has been slow as has been highlighted by a 2019 report from UNISON. The trade union’s report ultimately concludes that “few funds are taking proactive steps” in this area. Instead, changes in the ownership of pension management companies and control of the funds could facilitate a significant shift in favour of decarbonisation.

Of course, funds in which there is employee or public direction or control over pension investments do not automatically equate to sustainable funds. For workers in particular, there might be obvious incentives to generate financial returns on investments regardless of the environmental impacts. However, where we have seen workers seeking to gain some influence on how their pension funds are deployed in recent years the tendency has been toward greater levels of environmental responsibility

The State Pension

Discussion of pension funds also warrants an examination of the UK’s state pension system, as needless to say the relationship between the state pension and private pensions is important. The UK seems to suffer from two contradictory narratives on the question of the state pension. There are those who argue that the state pension is too generous due to the ‘triple lock’, the policy that sees pensions rise by inflation, wages or 3% (whichever is highest) and the comparatively high proportion of pensioners who are well off.

There are others (not least myself) who would point out that the UK’s state pension is among the lowest in the Global North when compared to levels of pay, and less than half of the OECD average. While pensioners as a whole are wealthier and more financially secure than previous age cohorts, it is simply untrue to argue this is a consequence of a generous state pension. And it is lower-earning millennials, not Baby Boomers, who are likely to miss out the most if the triple lock were scrapped.

The reason the current cohort of pensioners are wealthier than preceding generations is largely a consequence of unprecedented asset (particularly housing) price inflation.  This, in turn, is a consequence of changes to our political economy over the last four to five decades. This is now leading to a ‘golden age’ of inheritance as Baby Boomers leave assets to their fortunate children and grandchildren.

For those without wealth, the state pension is inadequate, even when topped up with pension credit and even after the introduction of the triple lock. This has had a particularly big impact on women. The average income of retired women is around £7,000 a year less than their male counterparts. Nearly one in four single older women are in poverty and the poverty rates for Black and Asian women are also considerably higher.

Some would argue that this issue is better addressed by incentivising greater contributions into private pension schemes during someone’s working life or by increasing means-tested supplements to the state pension. The latter would involve administratively costly and socially divisive means testing, which risks stigmatising beneficiaries. This further risks deepening inequalities between those who have retired from middle and higher income jobs on the one hand and the lower paid, unemployed, underemployed and disabled on the other.

Nor is the full state pension currently genuinely universal. At present, eligibility is based on the number of years of National Insurance Contributions. Since 2016, the retired need to have made 35 years of National Insurance Contributions or to have paid for ‘gaps’ in their record (or be credited for these as part of National Insurance Credits). Moving towards a system that is genuinely universal would be vital in preventing people from slipping through the cracks and being left with little or no income in retirement.

Addressing the question of private pension funds ought to also involve expanding the state pension. The UK with its wealthy, low tax economy can afford to invest in giving people dignity in retirement. A much more generous state pension has the potential to be a lever for much greater equity in retirement, rather than reinforcing earnings disparities. Increasing the rate substantially would involve longer-term costs to the taxpayer, but these ought to be paid for by progressive taxation – principally on high incomes and wealth-related taxes. This process would be substantively redistributive, taking from the best off and sharing out the proceeds among the many.

Toward Public Control

Rather than the status quo, the UK’s pension funds should be managed democratically and in the public interest. Instead of leaving funds in the hands of private asset managers, the public’s savings could be steered toward socially useful and environmentally necessary investment rather than funding risky investments and fossil fuel-intensive industries. As one of the key institutional investors in the modern economy, pension funds need to have the public in control if we are to socialise investment.

In this context, steps toward employee-run pension funds might look like an attractive option. But this would present clear problems as well as benefits. Firstly, this could risk leaving a significant disparity between those with pensions and those without. This problem is tempered by auto-enrolment but it is not resolved by it – look at how many self-employed people lack pensions and how much of the population is outside of the workforce altogether. Rather than amounting to ‘pension fund socialism’ this would risk encouraging employees to act as mini-capitalists, looking to extract resources from other workers. The likelihood is that a significant number of these workers, on what is effectively the losing end of the bargain, would be those in lower income countries -though this is not to say that this problem disappears automatically with a publicly-run pension fund.

Funds would be better run not just to generate returns to workers but in a framework in which decisions are collective and democratic, socially motivated and ecologically sound. Taking pension funds under the stewardship of a National Investment Bank (NIB) and Regional Investment Banks (RIBs) as Ann Pettifor suggested in 2018 could be the key step in this process. The creation of a new, standalone democratic public bank could also achieve the same ends.

These funds could then be ploughed into a Green New Deal, creating well-paid, unionised jobs in sustainable and urgently needed economic activities. Given that the £250bn spending levels in Labour’s 2019 Green Transformation Fund plans arguably fell short of the scale needed to address the ecological crisis, pension funds could effectively be used to plug the gap.

These same funds could also be used to create high-quality jobs which address other social priorities including, but not limited to, industrial democracy, ending regional inequalities and reductions in working time. This process could be achieved more gradually through encouraging switching to the NIB scheme – or it could be done more immediately given the urgent need to decarbonise. And, as Pettifor has argued, existing tax reliefs on pensions could be tied to new conditions which require that the  funds are invested in ways that support the public interest and the need to green the economy.

Another similar route could involve transforming the NEST pension scheme, which is already a public corporation, into a public sector-run pension fund. This would see NEST reconfigured from its present iteration, as a publicly owned company which acts as trustee, to managing the funds directly. Much like a National Investment Bank should be, this company should be collectively and democratically-run with social objectives at its heart. Trustees could be directly elected, both to represent employees enrolled in the scheme and by the wider public – to represent society as a whole.

This would be a key step toward democratising control of investment decisions. A third option might involve the People’s Asset Manager proposed by Grace Blakeley in much the same way. This would be a publicly owned asset manager with a mission to socialise ownership across the economy as a whole. These funds would be used to “support the objectives of the Green New Deal”, though they could be tied to a variety of different social objectives.

The pension system has seen tremendous amounts of privately controlled capital built up over the decades, while the state pension scheme has largely been left behind. This is why a generous and universal state pension is as important and necessary as a shift in ownership and control of private funds.

There is also a need to look at reforming fiduciary duties so that pensions funds are no longer obliged simply to maximise returns but to act sustainably and in the wider public interest, while generating a return to ensure members have dignity in retirement.

If ‘pension fund socialism’ is a social system in which common ownership is based on mass employee ownership of pensions, then it does not make a convincing case for itself. This whole argument risks conflating broadening ownership of capital with radically expanding democracy. Nonetheless, especially in light of the environmental crisis, ownership and control of pension funds is a key terrain in the pursuit of transformative change.

Adam Peggs is a writer and activist based in Deptford, London. 

Image: License: Creative Commons 3 – CC BY-SA 3.0 Attribution: Alpha Stock Images – Original Author: Nick Youngson – link to –

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