Cushon claims to be Britain and possibly the world’s first Net Zero pension scheme. So far, this is because they buy carbon offsets to mitigate the damage done by other investments. This was not sustainable , in the long term it will not be credible and it is certainly not commercial. Cushon needed a default fund reset.
It has introduced that re-set in the launch of its new default fund
Last week I challenged Cushon to tell me how the re- launch of its default fund could deliver good outcomes within the charge cap and demonstrate it is a pension for a particular environmental and social purpose.
This week can publish the outcomes of conversations with Cushon and its investment strategist Julius Pursaill. I am aware that several other workplace pensions are giving their default funds a thorough makeover, to meet self-imposed targets. I will be happy to write about what they are up to as well. I want to promote better practice because we are a long way from stopping global warming, sorting our housing crisis , funding innovation and creating the conditions for a “better world”.
What is Cushon up to?
Cushon has re-launched its default fund, the fund that more than 95% of its savers use to build up a pot to provide themselves with a pension.
The Cushon default fund growth phase has three “sleeves” –
- listed equities 75%,
- listed bonds 10%
- private markets 15%.
So this is a broadly diversified global equity portfolio with a significant climate and ESG tilt to it.
The purpose of the pension is to maximise member outcomes through a net-zero approach to investment. If offers savers two sources of value – return and impact.
Where’s value to come from?
Value is created in two ways, the fund is intended to deliver good long term outcomes in a way that reduces risk to the planet (mainly climate risk but also social risks and risks from bad corporate governance).
The listed bonds use active (investment grade) impact strategies. There are two bond portfolios, the climate impact is addressed through a concentrated active portfolio supporting companies that are tackling climate change. The social and climate impact is addressed through a second concentrated active portfolio which has a broader set of impact objectives.
The global listed equities are smart beta. The index is a custom Cushon index.
The index delivers a 60% immediate reduction in financed carbon emissions (CO2e). In addition, using forward looking metrics, the index tilts towards green companies and away from brown companies. It delivers better alignment with the UN Sustainable Development Goals than the standard global index. So it adds a social impact dimension and broad ESG integration into the strategy.
The private markets sleeve is multi asset – though large allocations to private equity, private debt, property and forestry. It’s designed to provide diversification, return and impact. It has a significant climate focus – investments include wind farms, solar farms and battery technology . It isn’t exclusively climate focused, because it (like the second bond mandate) has a broader set of impact objectives, which include social housing.
How does it address challenge that it may be buying into over-priced assets
Cushon tells me that the whole portfolio is designed to produce market leading risk adjusted returns (and a lot of climate and broader social impact risks). Its design means it’s sensitive to the way the market prices climate and other impact assets . It reduces exposure to the downside of climate change by underweighting or excluding companies that are likely to be hit hard by transition.
Julius Pursaill explains
If you believe that climate and other ESG risks are fully priced by the market already, then this portfolio won’t deliver any excess return. Cushon doesn’t believe the market has fully priced these risks. Cushon thinks it should therefore deliver excess return.
How do the investment costs compare ?
The exposure to liquid equities is delivered through TrueIndex. On this portion of the portfolio, Cushon picks up all transaction costs, so the members get the full index return, with no tracking error. As listed equities comprise the majority of the portfolio , this is signficant and welcome.
Cushon claims that members pay 0.15% pa to be in this diversified default. ,It claims that this represents value for money and I’d agree. Certainly this cost is considerably higher than the cost of simply investing in passive bonds and equities but there is considerably more going ob.
Further member charges apply to meet operational costs and these are established with reference to the participating employer’s “covenant” ( the commercial viability of the employer scheme). I have this statement from Cushon’s commercial team.
The platform charge is underwritten when we price pension schemes but our ‘standard’ platform charge is 40bps before the 15bps FMC is added. This is our starting position. In practice, charges have been coming in significantly below that. We don’t apply employer charges or monthly member contribution charges.
It will be interesting to know what additional costs are incurred over the quoted 15 bps (especially from the private market allocation). No doubt these will be reported on in future chair statements..
How about quality of service?
One of the areas that can distinguish a modern pension , is the access it gives its members to relevant information. Increasingly members want to know what they are invested in and express interest in the key votes taken. Leading the charge on making this happen is Tumelo,
The Tumelo member stewardship functionality is already integrated into the proposition. Tumelo works for listed stocks, but what about private markets?
Pursaill argues that quite apart from their capacity to improve returns and diversify risk, these private assets offer a chance for members to connect their savings to the real world change they are helping achieve.
More engaged members can make better decisions. Better decisions produce better outcomes and more value for money.
As mentioned in an earlier blog and by way of example., Cushon are promising that members will be able see the forestry and see the biodiversity it brings.
How does Cushon justify its new investment strategy?
Cushon claims it is clear in setting out out its investment beliefs. These beliefs are what has driven Cushon to change its approach. To quote Pursaill
….. it’s not just whether you think there is a climate (or other impact) investment premium to be enjoyed or not. Whether you do, (or don’t) you need to be clear why you believe that to be the case.
If (as Cushon does) you believe the market mis-prices these risks, you need to know how you will recognise the market fully repricing them. You need to know the methodology you think might capture any premium and why, and then what investment strategy you will adopt as and when you believe these risks are fully priced by the market.
The alternative for Pursaill is to pay a “greenium” for impact. You do this because you believe that you can’t earn a market rate of return and deliver impact at the same time. An example might be the explicit reduced yield on Green Gilts. You get a lower return because you are paying for something that can’t be had from non-green gilts.
The Greenium is what Cushon had to pay for because it couldn’t get to net-zero using the original default. The carbon offsets were paid by the shareholder but gave little scope for a competitive flexible platform fee. In the long-term, the market would have seen the cost of the offsets as reducing member outcomes. Paying to save the planet out of member returns is an unsustainable strategy for fiduciaries in default funds.
Does the new strategy square the circle?
If Cushon’s original default was unsustainable from a fiduciary perspective, what has changed?
Pursaill argues that because these are matters of belief rather than fact, it’s very difficult (if not impossible) to achieve any consensus by looking for evidence. The trustee has to buy into the investment beliefs that have driven the construction of the default and many trustees won’t.
A skeptic would argue that the observed ESG driven excess return to date has only been caused by excess demand for ESG assets – Pursaill might argue that that is going to continue for a long time to come. It could also be argue that where a climate premium hasn’t been seen to date, the next ten years will be different……
But the point is that a trustee can adopt or reject a strategy so long as its purpose is clear and it’s investment beliefs clearly laid out. As importantly so can employers choosing whether or not to participate in Cushon and members have the right to opt out of their workplace pension or even change employers to be in a different one.
The trustees of the Cushon workplace pension scheme
- Barry Parr. Barry Parr
- Dianne Day.
- Roger Mattingly. (Chair)
- Andrew Warwick-Thompson.
The point of having a choice of workplace pensions is only valid if the choice is meaningful and that means workplace pensions need to be differentiated. Viva diversity!
How does Cushon mark its homework?
The second bucket of tricky issues is how you measure impact. One challenge is there are already different competing methodologies out there, with differing criteria being used both to differentiate between “real” impact strategies (doing what they intented to do and doing things that otherwise wouldn’t have happened) and strategies that arguably deliver impact but don’t obviously meet these tests.
If you get positive impact by accident, does it count? How much of a purist do you want to be?
Then there is the challenge that different organisations will be seeking different forms of impact – from improving soil fertility and stability, to improving insulation in housing stock, or to reducing societal inequality .
Metrics associated with these objectives often rely on a mix of objective specific hard data and qualitative judgments. It’s still very hard for me to conceptualize what a single impact metric might look like.
I suspect that we will have to wait for performance measurement to evolve for us to find a way to consistently compare the value for money of impact!
A pension for a better world?
To grow , Cushon will need to convince employers and savers that it is offering something different. It has set out with a strongly differentiated marketing approach “net-zero now” and has followed up with a default strategy with clear purpose, investment beliefs and a strategy that is intended to deliver performance and impact.
While being cautious about “win wins”, the trustee board and Cushon’s management do give me confidence. This is a workplace pension operating within the Pension Regulator’s Master Trust Assurance Framework. It is certainly aiming to provide members with a better world in their later years and I’m pleased that we have it as a choice for employers and their staff.