Pension Funds and Social Investment

Current project status

  • Initiation: Could include discussing scope and terms of reference with lead Government Department
  • Pre-consultation: Could include approaching interest groups and specialists, producing scoping and issues papers, finalising terms of project
  • Consultation: Likely to include consultation events and paper, making provisional proposals for comment
  • Policy development: Will include analysis of consultation responses. Could include further issues papers and consultation on draft Bill
  • Reported: Usually recommendations for law reform but can be advice to government, scoping report or other recommendations

Helping pension funds invest in social investment to do good and do well at the same time. The Government has agreed to work towards implementing our reforms.

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The problem

Workplace pensions are changing rapidly. Traditional defined benefit (DB) schemes are being replaced with defined contribution (DC) schemes, where each member’s income in retirement depends on how their contributions are invested.

Employees are no longer required to make a positive choice to join a workplace pension to save towards retirement.

Instead, employees are automatically enrolled into a workplace pension and must take action if they wish to opt out.

The vast majority are placed in “default funds” where decisions about how funds are invested are made by those administering/managing the scheme rather than the individual.

The assets in DC schemes are expected to increase sixfold by 2030 to £1.68 trillion, a sum equivalent to 15% of the current net wealth of the UK.

These changes raise questions about how the new pension assets are to be invested and, in particular, whether at least a proportion could be invested for the wider social good or “social impact”.

The project

In November 2016, the then Minister for Civil Society, Rob Wilson MP, asked the Law Commission to look at how far pension funds may or should consider issues of social impact when making investment decisions. Our full terms of reference were:

  • To provide an accessible account of the law governing how far pension fund investment policy may or should consider issues of social impact, looking at:
  • Defined contribution default funds;
  • Defined contribution chosen funds; and
  • Defined benefit schemes.
  • To provide an accessible account of the law governing the forms which may be used by social enterprises.
  • To consider whether there are legal or regulatory barriers to using pension funds for social impact (including investment in social enterprises); and
  • If appropriate, to set out options for reform.

We carried out a call for evidence and reported on our findings in June 2017.

Previous work on fiduciary duties

This project builds on our 2014 report, Fiduciary Duties of Investment Intermediaries and accompanying guidance, which considered when pension trustees can take environmental and social factors into account when making investment decisions.

The guidance clarified that pension trustees should take into account factors which are financially material to the performance of an investment, balancing returns against risks. This includes risks to the long-term sustainability of a company’s performance.

We said these risks may arise from a wide range of factors, including poor governance or environmental degradation, or the risks to a company’s reputation arising from the way it treats its customers, suppliers or employees.

Although financial return should be trustees’ predominant concern, the law is sufficiently flexible to allow other, subordinate, concerns to be taken into account in some circumstances.

The law permits pension trustees to make investment decisions that are based on non-financial factors (such as environmental and social concerns), provided that:

  • they have good reason to think that scheme members share the concern; and
  • there is no risk of significant financial detriment to the fund.

Our 2017 recommendations

Our report found that the law is flexible enough to allow some social investment by pension funds.

The barriers to social investment by pension funds that we identified were, in most cases, structural and behavioural rather than legal or regulatory.

We set out options for reform where we have identified steps which could be taken by others to address these barriers. We also make some recommendations where we have identified that the law could be improved so as to reduce the impact of these barriers.

These recommendations were identified in our 2014 report and have been updated in light of the current pensions landscape.

We recommend that:

  • For trust-based pensions, the Occupational Pension Schemes (Investment) Regulations 2005 should be amended in the following ways:
    • The reference to “social, environmental or ethical considerations” should be amended to ensure that it accurately reflects the distinction between financial factors and non-financial factors.
    • There should be a requirement that the statement of investment principles (SIP) produced by trustees should state trustees’ policy (if any) on stewardship.
  • For contract-based pensions, the Financial Conduct Authority should require schemes’ Independent Governance Committees to report on a firm’s policies in relation to:
    • evaluating the long-term risks of an investment, including relating to corporate governance or environmental or social impact;
    • considering members’ ethical and other concerns; and
    • stewardship.
  • We also recommend that the Financial Conduct Authority should issue guidance for contract-based pension providers on financial and non-financial factors, to follow the guidance for trust-based schemes given by The Pensions Regulator.

We suggest ‘options for reform’ in the following three areas:

  • investment in social enterprises (such as charities and community interest companies);
  • investment in property and infrastructure; and
  • encouraging savers to engage more actively with their pensions.


The Government issued an interim response in December 2017. In June 2018 the Government made its final response. In these responses, the Government agreed to work towards implementing our reforms and pledged to continue “to work with the financial services industry and regulators in growing the positive impact of pensions in the UK”.

The responses refer to a number of relevant areas in which the government or other regulatory bodies are taking, or intend to take, action.

We are particularly pleased that the government has implemented our recommended changes to the Occupational Pension Schemes (Investment) Regulations 2005, which we first considered as part of our 2014 report on Fiduciary Duties. They were implemented in the Pension Protection Fund (Pensionable Service) and Occupational Pension Schemes (Investment and Disclosure) (Amendment and Modification) Regulations 2018.


Documents and downloads

Project details

Area of law

Commercial and common law


Stephen Lewis