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42% of total wealth in Great Britain is held in private pensions. But how much do we know about how that wealth is invested? Who decides how this money – our money – is allocated, and how does it affect the planet?
This explainer travels the chain pensions follow from workers to investments and highlights three alternative models for investment and ownership that would give us all a say over where our money goes and how it is used.
If you pay into a pension, you're investing in your own future. But you're also investing, indirectly, in businesses and assets across the whole economy. How aware are you of the journey that investment takes? Discover why the system is long overdue a democratic overhaul by following this pathway as it exists today.
Pensions are deferred wages – a smaller paycheque in the present for a secure income in retirement. If you have a pension, every month you pay into a pot that you will receive payments from in the future, possibly decades away. In the interim, your deferred wages become part of a large pool of contributions from everyone participating in the scheme, called the beneficiaries.
Importantly, that cash doesn't just sit there. Instead, the pool of funds is invested in a range of assets so that, in theory, the fund grows over time to maximise your payouts in retirement. This means that your money is used to buy up stocks, bonds and a range of other investments. Even though it is your money being invested, as a beneficiary, you typically have little to no say in how these investment decisions are made, or how those assets are used, for instance to influence companies in which the pension fund owns shares. Instead, this is done by a chain of “intermediaries”, starting with the management of the pension fund itself.
Money paid in by workers is collected into a pooled fund, managed by “trustees” who are appointed to oversee the investment and management process.
Pension trustees are bound by a “fiduciary duty” which requires them to behave in a way that aligns with their beneficiaries' best interests. Presently, this arrangement generates two important issues.
Firstly, who gets to decide who these trustees are? Overwhelmingly, workers have no say in electing the individuals who oversee their pension assets.
Secondly, how is “fiduciary duty” interpreted? Legally, the definition is vague, and in practice it is generally interpreted as maximising risk-weighted financial returns for the fund.
However, this is a very narrow interpretation, particularly when those nearer-term financial returns could be – and often are – in direct conflict with other interests beneficiaries might have, like better wages and conditions for workers today in the companies that the pension invests in, or reducing corporations' carbon emissions and pollution to ensure a safe and thriving planet.
Through their ownership of shares in corporations, shareholders are entitled to vote on corporate decisions at annual general meetings on everything from environmental targets to who is appointed to the company's board of directors. These votes, alongside directly engaging with corporate management, can have major implications for a firm's actions. Traditionally, pension funds often invested in shares directly; indeed, for a period they were often the largest shareholders in major corporations. Over the past few decades, however, this has shifted. Today, most pension funds have handed over the work of investing to yet another intermediary: the asset management industry.
Asset managers are for-profit firms who do exactly what their name suggests: manage assets on behalf of others. This means they both decide what to invest in and, because they are the ones directly buying the assets, they receive any other rights that come from those assets. When it comes to corporate shares, this means they get the right to vote on many corporate decisions.
Therefore, even though they are investing with our – as beneficiaries – money, asset managers get to use that money to direct corporations' behaviour without our direct consent. Beneficiaries tend to have little say over what these managers invest in, meaning we can't voice democratic demands, such as ensuring they invest and vote in line with urgent concerns like environmental sustainability and economic equality.
The result is an investment system that is deeply undemocratic, with the people whose assets and interests are at stake having no say in who gets to oversee those interests, how investment decisions are made, and how that influence is used over corporate behaviour. Moreover, the large portion of the population with no financial or pension assets are excluded altogether.
At the heart of many problems with the current pension system is that over time, as more and more pensions and other types of asset owner like university endowments have outsourced investing and voting to asset managers, a small number of these firms have grown to have enormous influence over the global economy.
Without clear instruction from pension trustees or democratic priorities from beneficiaries, most asset managers invest in line with the narrow and often singular mandate of maximising financial returns. However, while this may serve a particular interest of those beneficiaries about to retire and access their pension pot, for those of us who've just started to pay in, other concerns like deepening climate crisis or stagnating wages are also pressing – both now and in the long term.
Without democratic input into how our assets are invested, these concerns tend to get sidelined. In the UK, the government has taken early steps to address this by creating rules that allow pension funds to take climate change considerations into account as part of fiduciary concerns. However, while this is a small improvement, it barely touches the sides of the problem.
As it stands, most asset managers, particularly the biggest firms like BlackRock, largely exercise their huge voting rights and access to corporate managers via "engagement" in a way that supports the status quo, signing off on new investments in fossil fuel exploration and development or outrageous disparities between executive and worker pay. Overwhelmingly, their concentrated control over voting is also accompanied by the exclusion of other stakeholders with real knowledge of the corporation, such as workers.
The system we've got today is clearly failing on several counts, from democratic participation and accountability to sustainability. So how can we change it? Below, we propose three models we can use to build a more democratic and sustainable investment system, starting with our pensions. For more detail on each, read our latest report "Asset Manager Capitalism: Where Next?".
Beneficiaries should be given the right to elect trustees, who should be directly accountable to them. Asset managers should be stripped of the right to vote without instruction from trustees. Fiduciary duties should be required to include addressing not only risks from the climate and nature crises, but also whether funds are contributing to creating these risks.
Democratising pensions is a necessary step, but alone is not enough. Inequalities in who has pension assets means even a democratic pension would still exclude large swathes of the population from participation, creating an economic democracy that is partial at best. To address this, a Public Asset Manager should be created to invest on behalf of society as a whole – not just those with pensions – to allocate capital to societally important initiatives and help govern corporations on behalf of all. It should be designed to use its investment positions to demand a more sustainable and equal corporate economy, with clear environmental and social criteria for which it is accountable to the public.
Ultimately, the corporation should be recognised and reorganised as an institution that can coordinate activity to deliver for the public good, meaning shifting away from shareholder returns toward accountability to workers and other stakeholders. Rather than control concentrated in the hands of a few asset management titans, the corporation and its outputs should be recognised as an institution of common, collective effort, with governance and priorities that reflect this.
The pensions system currently contributes to a highly undemocratic economy, where a handful of asset management firms have decisive power over decisions that have huge impact on our lives, from the climate crisis, through corporate profiteering, to growing inequalities between workers and executives. But this is ultimately a system that is built on our money.
It should be made democratic, taking everyone's concerns and interests into account. Because of their long-term investment horizons and the fact that pensions represent a huge fraction of assets in the investment system, pensions should be required to take big picture, long-term threats and priorities into account, like the climate crisis and inequality.
However, because not everyone in society has a pension and because pension assets are very unequally distributed by both age and income, to be truly democratic, we can and should go further. In place of shareholder "discipline", the corporation should no longer be organised around the control of shareholders – particularly unaccountable asset management firms – so that actual stakeholders in the company, such as workers, have a meaningful say in how it is governed.
Our latest report makes several proposals for how our investment system could become democratic and sustainable by design.
For much more on how we build a radical alternative, see our latest report "Asset Manager Capitalism: Where Next?".