Church of England embarrassment over investment in Wonga backer shows how hard it is to know where the funds end up
When Justin Welby, the new Archbishop of Canterbury, announced late last month that he intended to “compete out of existence” payday lenders such as Wonga, it was a nice diversion from the heatwave, the royal birth and British sporting triumphs.
It also chimed perfectly with the Church of England’s investment policy, which recommends against funding any company that makes more than 25% of its turnover from lending at high interest rates (as well as from tobacco, gambling, alcoholic drinks, or human embryonic cloning).
But the press couldn’t believe its luck just 24 hours later when it was revealed that the Church has indirectly backed the very company that Welby attacked.
Beyond the silly season schadenfreude, however, is a more serious point. If Welby, a prominent member of the Parliamentary Commission on Banking Standards as well as head of an organisation with a clear ethical investment policy, doesn’t know where his pension pot is being invested, what hope is there for the rest of us?
Part of the problem is that people are very divorced from their pension funds. Paying into a pension fund is a form of investment, but “lots of people do not pay nearly enough attention to what they are investing in”, says Stephen Hine, head of responsible investment development at Eiris, an ethical investment analysis firm.
However, there is a good reason for that, says Margaret de Valois, global pensions and investment director at accountants Mazars. “The average person is not an investment specialist. They know they need to get a return on their money but they don’t have the time or specialist knowledge, so they delegate that job to pensions advisers.”
Then they tend to forget about it, trusting those advisers to provide the returns they need. The advisers will do that by investing in the shares of companies they think will make money – including Wonga, weapons manufacturers, tobacco companies and fossil fuel companies – unless you tell them not to.
Most people are uninterested and “ill-equipped to engage with a complex industry and a complex decision-making process,” says Jonathan Ditchfield, director of Barchester Green, a financial adviser focused on ethical and environmental investment. “People tend to be very passive buyers of pensions advice.”
In fact, if you are in a defined benefit scheme (and about 4,000 of the UK’s DB schemes are still accepting new members) you have very little choice about where your money goes. “It is difficult to find out what the fund is investing in and practically impossible to have any influence over the investment strategy,” says Jonathan Price, a lecturer at the London School of Business and Finance.
“Pension fund trustees have a fiduciary duty to produce the best returns for their beneficiaries,” he adds, and they are independent of the parent organisation so they may invest in sectors or companies that conflict with the sponsor organisation’s values. However, you can, like the church and other religious groups, specify that the fund should not invest in certain areas for ethical reasons.
And growing numbers of investors want money managers to consider environmental, social and governance (ESG) issues when they look at companies, because they think these issues can affect business performance and investment returns. For instance, 50-60% of the average pension fund portfolio is invested in high-carbon assets, according to the Asset Owners Disclosure Project. Assets such as coal-fired power stations will increasingly be affected by climate change and the regulation to tackle it, and as a result may not be worth what the market says they are today. The end result will be less money than pensioners were expecting.
If you belong to a defined contribution (DC) scheme, you have a choice of funds to put your money into. But, perhaps understandably, about 90% of those that take out a DC pension choose the default fund, says de Valois, and with up to 10 million more people set to take out a pension under the government’s new auto-enrolment rules, that’s an awful lot of people trusting in City whizzkids – the ones that hardly covered themselves in glory during the financial crisis – to provide for their retirement.
Even if you are more engaged, it is not necessarily any easier to keep track of where your pension pot is being invested. The church did not invest directly in Wonga, after all – it invested in a venture capital firm that put a fairly small proportion of its funds into the company. And, despite Welby’s embarrassment, it did not breach its ethical investment policy as Accel, the firm in question, did not commit 25% of its capital to Wonga.
“It is a complicated world out there,” says Church of England spokesman Steve Jenkins. “There will be times when something slips through, but then we deal with it. The fact that we are dealing with it is what matters.”
For some, though, it should be easier for people to know where their pension pot is invested. “Whether you are concerned only with your financial returns or with the ethical side of investing, it is extremely important that the industry becomes more transparent and accountable to savers,” says Catherine Howarth, CEO of ShareAction. “The situation at the moment is pretty dire. What happened with Wonga is an incredibly important wake-up call.”