The government has been urged to ensure that investment in social and environmental sustainability, and efforts to tackle intergenerational inequality, are at the heart of its planned pension reforms.

In an open letter to Pensions Minister, Laura Trott, LCP and Pensions for Purpose called on the government to encourage pension schemes to invest more in areas that drive forward sustainability goals, particularly in light of the proposed Mansion House reforms.

The pair suggested that structural changes will be needed to enable this, noting that as funding levels have improved, many pension schemes have significantly de-risked their assets and are predominantly invested in gilts and low-risk corporate bonds, where there are fewer opportunities to hold impactful sustainable investments.

It also suggested that the current interpretations of fiduciary duty can often discourage long-term sustainable investments, despite evidence these investments can offer comparable or better returns.

To combat this, the letter called for a re-think on the interpretation of pension trustee fiduciary duty, suggesting that reframing this duty could guide pension schemes to take a longer-term perspective when decision making, and contribute to broader climate and societal goals.

In addition to climate concerns, the pair warned that there is a “clear risk” the current pensions system upholds systemic intergenerational inequality, which could pose a number of long-term risks to society and the economy.

Given this, LCP and Pensions for Purpose urged the government to innovatively resolve some of these issues, highlighting LCP's suggestion of a Pension Protection Fund (PPF) 'opt-in' system' as one option to address these concerns.

LCP consultant, Laasya Shekaran, commented: “We are supportive of incentivising pension schemes to invest in productive finance but believe such investing must support sustainable impact.

“Now is the time to break down existing structural barriers, and to look to new and innovative ideas to ensure pension funds can invest in ways which make sense for people and planet.”

Pensions for Purpose CEO, Charlotte O’Leary, added: “Clear action needs to be taken on ensuring sustainability is integrated into all levels of pension fund decision making, including fiduciary duty, the governance process, mechanisms for consolidation and intergenerational fairness.

“This can only be achieved through collaboration between the pension industry, government and regulators. What we are talking about requires a paradigm shift in thinking and the time for that is now, not just to protect but to enrich pension member outcomes, society and the environment.

“We strongly urge the UK government, The Pensions Regulator and industry stakeholders to work with us in implementing these targeted reforms.”

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