In today’s rapidly evolving financial landscape, pension funds stand at a critical crossroads. With over $60 trillion in collective assets under management globally, these institutions wield enormous influence over our economic future. Yet most remain surprisingly disconnected from one of their most fundamental strategic opportunities: investing in ways that directly benefit their own beneficiaries beyond simple financial returns.
The concept of intergenerational equity in pension investments offers a compelling framework that goes beyond traditional social impact investing. It suggests that by strategically directing capital toward education and training in lower and lower-middle income countries, pension funds could simultaneously generate financial returns while creating social conditions that enable their beneficiaries to thrive in later life.
The Intergenerational Equity Challenge
At its core, intergenerational equity represents fairness across time, ensuring future generations inherit a world as good as ours. When applied to investments, this concept prioritizes the well-being of both current and future generations through sustainable resource allocation. This approach challenges the traditional investment paradigm that often prioritizes short-term profits over long-term consequences.
For pension funds, the intergenerational equity challenge is particularly acute. These institutions must balance their fiduciary duty to current beneficiaries with their responsibility to future generations. As universal owners with highly diversified, long-term portfolios representative of global capital markets, pension funds are exposed to widespread systematic risks that cannot simply be diversified away.
The World Economic Forum’s Global Risks Report highlights how these systematic risks-including climate change, social inequality, and political instability-threaten the very foundations upon which pension systems depend. Addressing these risks requires a fundamental rethinking of how pension capital is deployed.
Beyond Traditional Social Impact
While social impact investing has gained traction in recent years, with the UK market alone growing to £10 billion by the end of 2023 (a 7% increase from 2022), most approaches still treat social returns as separate from financial performance. The intergenerational equity approach goes further by recognizing the direct connection between social investments and the well-being of pension beneficiaries themselves.
The fundamental insight is straightforward yet profound: pension recipients’ quality of life depends not just on their financial resources but on the social infrastructure around them. A well-educated, well-trained younger generation is better positioned to provide healthcare, develop innovative technologies that improve seniors’ lives, maintain critical infrastructure, and sustain the economic productivity necessary to support pension systems.
As Karen Shackleton, founder of Pensions for Purpose, notes: “Social impact can deliver strong financial returns while benefiting the communities and individuals pension funds serve”. The intergenerational equity approach takes this connection a step further by explicitly targeting investments that strengthen the social fabric upon which pension beneficiaries depend.
Current Frameworks and Global Context
Several existing frameworks already point toward the potential of intergenerational equity approaches in pension investments.
Two-Pillar Pension Systems
Research on two-pillar pension systems demonstrates how properly structured pension arrangements can facilitate optimal intergenerational risk-sharing. As one study notes, “The combination of properly specified first-pillar PAYG systems and second-pillar DB pension funds can establish the twin objectives of optimal intergenerational redistribution and optimal intergenerational risk-sharing”.
While this research focuses primarily on risk-sharing within domestic pension systems, its principles can be extended to international contexts. Just as domestic pension pillars can be designed to share risks optimally between generations, international pension investments can be structured to create mutually beneficial relationships between pension beneficiaries and younger populations in developing countries.
Outcomes-Based Financing
Innovative financing mechanisms like the Ghana Education Outcomes Project offer promising models for pension fund involvement in educational investments. This project aims to get 70,000 out-of-school children back into classrooms and improve learning outcomes for over 100,000 children.
For pension funds, these outcomes-based approaches provide several advantages:
- Payments linked to independently verified educational outcomes create an asset class with returns uncorrelated to traditional markets
- The outcomes-fund structure allows risk diversification across multiple educational projects
- Successful models can be replicated efficiently across countries, creating scale opportunities
Impact Investment Principles for Pensions
The Impact Investing Principles for Pensions provide a structured framework for pension funds entering this space:
- Set impactful objectives: Establish and incorporate impact objectives as part of the pension scheme’s statement of investment principles
- Appoint investment consultants and managers with impact integrity: Identify partners aligned with the scheme’s investment beliefs and objectives
- Use your voice to make change: Progress impact objectives through voting and engagement activities
- Manage and review your impact: Monitor progress against impact objectives using relevant indicators and benchmarks
These principles offer a starting point for pension funds looking to incorporate intergenerational equity considerations into their investment strategies.
The Virtuous Circle: How Intergenerational Equity Creates Direct Benefits
The intergenerational equity approach creates a virtuous circle where investments in education and training in developing countries yield multiple benefits for pension beneficiaries:
1. Financial Returns
Investments in education and training in developing countries can generate competitive financial returns. As these economies grow and develop, the value of these investments appreciates, providing pension funds with the financial returns they need to meet their obligations to beneficiaries.
2. Reduced Systematic Risks
By addressing fundamental social and economic challenges in developing countries, these investments help reduce the systematic risks that threaten pension portfolios. A more educated global population is better equipped to address challenges like climate change, political instability, and pandemic risks.
3. Future Workforce Development
As populations in developed countries age, many face labour shortages in critical sectors like healthcare and technology. By investing in education and training in developing countries, pension funds help create a future workforce that can fill these gaps.
4. Innovation and Economic Growth
Better-educated populations drive innovation and economic growth, creating new markets and opportunities for investment. This broader economic development benefits pension portfolios through increased returns across multiple asset classes.
5. Direct Care Benefits
Perhaps most directly, a better-educated global population is better positioned to provide quality care for aging populations. This includes both direct healthcare provision and the development of technologies that improve seniors’ quality of life and independence.
Real-World Examples and Case Studies
Several pension funds have already begun exploring approaches that align with intergenerational equity principles:
The Merseyside Pension Fund
The Merseyside Pension Fund (MPF) invested £1 million in the Bridges Fund Management Social Impact Bond Fund, which then invested in a program called “Unlocking Potential” that directly benefited the Merseyside region, where many of MPF’s members live and work.
This program provided coaching and support to disadvantaged 14-17-year-olds in the Greater Merseyside region who were at risk of becoming NEET (not in education, employment, or training). By 2017, it operated in over 100 schools and colleges in the region, delivering measurable social outcomes in the same communities where the pension fund members lived.
Clwyd Pension Fund
The Clwyd Pension Fund (CPF) has taken a strategic approach to social impact investing, matching investments to the UN Sustainable Development Goals (SDGs). Currently, around 22% of their total fund is invested in such opportunities, with a particular focus on sustainable living, health and well-being, and education & skills SDGs.
Their investments address an aging population, community health support projects, the provision of children’s nurseries, and cleaner transport developments-all areas that create direct benefits for their beneficiaries beyond financial returns.
Cushon
Cushon, winner of the Pensions for Purpose 2021 Social Impact Award for Pension Funds, demonstrates how pension schemes can integrate social impact throughout their investment process. Their strategy includes investments in sustainable infrastructure projects in low- and middle-income countries to improve access to telecoms, education, and medicine.
What makes Cushon’s approach notable is their commitment to impact reporting, including reporting on the Sustainable Development Goals and, where possible, aggregate fund-wide social impact data points.
Building a New Intergenerational Equity Investment Vehicle
While existing pension funds can incorporate intergenerational equity principles into their investment strategies, there’s also an opportunity to create a dedicated investment vehicle specifically designed around these principles. Here’s how such a vehicle might be structured:
1. Purpose-Locked Governance
The investment vehicle should have governance structures that lock in its intergenerational equity mission. This could include:
- A board with equal representation from pension beneficiaries, younger generations, and education/development experts
- Legal structures (such as benefit corporation status) that require consideration of intergenerational impacts
- Performance metrics that measure both financial returns and intergenerational equity outcomes
2. Blended Capital Structure
The vehicle would utilize a blended capital structure that combines:
- Core funding from pension funds seeking both financial returns and intergenerational benefits
- Catalytic capital from foundations and development finance institutions to de-risk investments
- Outcome payments from governments and multilateral organizations for verified educational improvements
3. Targeted Investment Focus
Investments would focus specifically on education and training initiatives in developing countries that create direct benefits for pension beneficiaries:
- Healthcare training programs that prepare workers for careers in elder care
- Technology education that leads to innovations improving seniors’ quality of life
- Infrastructure development that creates more age-friendly communities
- Financial services education that improves pension system sustainability
4. Rigorous Impact Measurement
The vehicle would implement rigorous impact measurement focused on both educational outcomes and benefits to pension beneficiaries:
- Educational metrics: enrolment rates, completion rates, skill acquisition
- Economic metrics: employment outcomes, income growth, sector development
- Beneficiary impact metrics: healthcare access, technology adoption, community support
5. Knowledge Sharing Platform
A dedicated knowledge-sharing platform would capture and disseminate learnings about effective intergenerational equity investments, helping to scale successful approaches and avoid repeating mistakes.
Implementation Roadmap
Creating an intergenerational equity investment approach requires thoughtful implementation. Here’s a roadmap for pension funds looking to adopt this strategy:
Phase 1: Foundation Building (6-12 months)
- Conduct stakeholder engagement with beneficiaries to understand their needs and concerns
- Develop an intergenerational equity investment policy
- Identify initial investment opportunities and partners
- Establish baseline metrics for both financial and intergenerational equity outcomes
Phase 2: Pilot Investments (12-24 months)
- Make initial investments in education and training initiatives
- Implement rigorous monitoring and evaluation systems
- Engage with beneficiaries to communicate the approach and gather feedback
- Document early learnings and adjust strategy as needed
Phase 3: Scaling and Integration (2-5 years)
- Expand investment portfolio based on early successes
- Integrate intergenerational equity principles across asset classes
- Collaborate with other pension funds to create larger pooled vehicles
- Advocate for policy changes that support intergenerational equity investments
Conclusion: A New Paradigm for Pension Investment
The traditional debate between public and private approaches to addressing social challenges is giving way to a new paradigm where mission-driven enterprises must harness market mechanisms to achieve social goals. Intergenerational equity investments by pension funds represent a powerful expression of this.
By directing capital toward education and training in developing countries, pension funds can generate financial returns while creating social conditions that directly benefit their beneficiaries. This approach recognizes that pension recipients’ quality of life depends not just on their financial resources but on the social infrastructure around them.
As pension funds increasingly recognize their role as universal owners with exposure to systematic risks, the intergenerational equity approach offers a compelling strategy for addressing these risks while fulfilling their fiduciary duties. By investing in the education and training of younger generations globally, pension funds can help create a world where their beneficiaries can truly thrive in their later years.
The time has come for pension funds to move beyond traditional approaches to social impact and embrace intergenerational equity as a core investment strategy. In doing so, they can create a virtuous circle that benefits both their beneficiaries and society as a whole.