Pensions

Prince Charles: We need 21st century pension funds

A lesson in investment from...Prince Charles?
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A lesson in investment from...Prince Charles?

The heir to the British throne, Prince Charles, has called on pensions funds and asset managers to renounce their short-sighted obsession with "quarterly capitalism" and invest in companies that tackle environmental and social challenges as they deliver the best long-term returns.

In a recorded statement for the National Association of Pension Funds (NAPF), the Prince of Wales raised concerns about whether the U.K.'s pensions system is designed to cope with a changing planet and ageing population.

"It falls to you (pension funds), I'm afraid, to help shape a system designed for the 21st and not 19th century," he said.

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"We are facing what could be described as a perfect storm," Prince Charles continued. "The combination of pollution and overconsumption of finite natural resources, the very real and accumulating risk of catastrophic climate change, unprecedented levels of financial indebtedness and a population of seven billion that is rising fast.

"With an ageing population and pension fund liabilities that are therefore stretching out for many decades, surely the current focus on quarterly capitalism is becoming increasingly unfit for purpose."

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According to Age U.K., the number of people aged 65 and over is expected to rise by nearly 50 percent in the next 20 years to over 16 million, and by 2083, roughly one in three people in the U.K. will be over 60.

Research from the Prudential earlier this year revealed that a fifth of people claiming their state pension this year will have an income below the poverty line, which is £8,254 ($13,268) according to the Joseph Rowntree Foundation.

Prudential interviewed over 8,000 non-retired adults over 45, including 1,007 who intend to retire in 2013, and found that 14 percent do not have a private pension.

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Tom McPhail, head of pensions research at Hargreaves Lansdown, agreed with Prince Charles' critique and the over-reliance on quarterly results.

"Prince Charles is right to highlight the importance of encouraging pension funds to focus on long term returns rather than trying to trade for a quick profit," he told CNBC. "Some trustee bodies are too quick to criticize a fund manager if investment returns are below benchmark for a couple of quarters."

David Collinson, co-head of business origination at the Pension Insurance Corporation, concurred with McPhail and said there was a connection between long-term investment and environmental consciousness.

"Trustees have a primary duty that the benefits being promised to pension members get paid," he said. "In order to do that, they need to make long-term investments. Therefore they need to invest in businesses that are sustainable, and you would expect a similar correlation with businesses that help society, help the environment, improve living standards, and improve infrastructure."

Wyn Derbyshire, head of pensions at SJ Berwin, agreed with Prince Charles in the need for a reform of U.K. pension schemes.

"It is an antique system,designed for a world of stable employment. We don't live in that world anymore," he said. "We live in a world where you can change jobs with much more flexibility, there is more ability to re-train, more educational opportunities, more career breaks. Our pension scheme is not geared to deal with that, and I think it should be."

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However, Steve Folkard from PA Consulting Group and the former head of pensions at AXA, said that Prince Charles' comments were "at a tangent to the role that pension scheme trustees are required by regulation to play in acting in the best interest of pension scheme members."

Folkard argued, "Prince Charles stated that 'Pension funds have a need and arguably a duty to ensure that these emerging environmental, economic and social risks are identified and managed.' Unfortunately the legal framework under which trustees operate focuses on investment return, not on the ethical nature of the underlying investments."

Indeed, while Collinson was in general agreement with the Prince of Wales' comments, he felt his criticism of a focus on quarterly results was off-target. He told CNBC: "The long-term is made up of lots of short-terms, and pension funds do look at quarterly performance. It's quite difficult to ignore it if you have a manager who is consistently under-performing quarter on quarter you going to ask why."

Furthermore, McPhail said that most environmental funds have consistently underperformed and therefore his views on an environmental agenda to investment were optimistic.

Derbyshire added, "Increased longevity is going to have all sorts of effects on society. Pensions are just a first wave breaking on the shore."