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Uncovering hidden risks in pension funds

The hidden risks in pension funds have been touched upon in two recent news stories. Firstly, a survey of more than 300 asset owners revealed that 66% of those managers in North America and Europe still have no process in place to independently monitor whether they are getting fair FX rates from their global custody banks.

Discovering the costs

The fact that two-thirds of asset owners are unaware of this critical piece of information is startling, considering the numerous lawsuits and scandals involving custody banks’ FX practices.

“We believe many pensions and endowments assume that when they hire an external manager, the external manager is going to be the fiduciary for all the FX trading related to that mandate,” said Joe Conlan, head of business development at FX Transparency (FXT). “But most of the time, that just isn’t the case.”

According to FXT data and research, 98% of external asset managers do not trade restricted currencies for onshore delivery. Instead, they leave that responsibility with the asset owner’s custodian. “Therefore, any pension that invests in emerging markets is making a bad assumption if they think they have outsourced their fiduciary duties in FX entirely to the external manager,” Conlan noted.

In addition, because custody banks act as the principal counterparty to these unchecked trades, they are financially motivated to set the highest acceptable rate - to achieve maximum profit - which is to the detriment of the pensions. Conlan added that this trend has, in part, led to record FX trading profits for these banks in 2020.

Financing carbon emissions

Elsewhere, research from Cushon, a fintech workplace savings disrupter, has found that a staggering 99.5% of the population have no idea about the scale of carbon emitted as a result of their pension’s investments. When coupled with the fact that each average UK pension pot finances the CO2 equivalent of 9 family cars, this lack of awareness is a national scandal, says the company.

The problem is not that people don’t care, but rather they just don’t know the extent of the problem. According to Cushon’s recent research, more than eight in ten (84%) people are concerned about climate change and 69% are specifically worried that their company pension could be investing in businesses that are contributing to climate change.

In 1995, the average carbon emissions per capita in the UK were 9.3 tonnes. Over the past 25 years the population has actively managed to reduce this output to 5.9 tonnes, yet the way we invest our pension pots remains relatively unchanged and finances nearly four times our personal emissions. Choosing to use a climate-friendly pension is minimal effort and saves the CO2 equivalent of 27 years’ of recycling each year.

With £2.2 trillion of assets held by pensions, and 62% of the population saying that they would engage more with their pension if they knew their money was making a positive impact on climate change, this exposes a massive missed opportunity for the UK to simultaneously do good for the planet and encourage healthier saving habits for retirement.

Climate change and savings habits are inextricably linked, and the pension sector’s part in this is a considerable, if poorly understood, part of the equation. In fact, each pension pot in the UK finances an average of 23 tonnes of CO2 emissions each year through its investments.  Yet, only a tiny fraction of the population is aware of this.

Finding net zero

Responding to this issue, Cushon recently launched a world first Net Zero Now pension. In doing so, their members are actively contributing towards slowing climate change and a 1.5 degree target. The fund has a management fee of 0.15%, while offering highly competitive returns without sacrificing performance.

Responding to the Cushon research, Baroness Ros Altmann CBE, former UK Pension Minister, said: “It is about time we put people's pension savings to good use in the battle to protect our planet and knowing their money can help long term sustainability will encourage more people to feel proud of their pensions.”

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