GREEN PENSIONS ARE ESSENTIAL TO FUNDING THE NET-ZERO TRANSITION

By Simon Daniel, Founder, Moixa

 

To meet the Paris climate agreement and G20 development goals, an estimated £5.2 Trillion is needed annually to invest worldwide in the transition to low carbon energy and infrastructure. Pensions could become a potential source to fund the green transition. In the UK alone, the current pension liability exceeds £8 Trillion, yet 75% of this is unfunded. £1 Trillion of this total is spent paying for energy and transport during retirement.

In the UK, over £1 Trillion could be offset against unfunded pension obligations to help resolve COVID recovery funding challenges and net- zero delivery by 2050. However, with UK debt exceeding £2.1 Trillion and with £6 Trillion in unfunded pension liabilities, a radical approach is needed to avoid saturating the tax-payer and the next generation with additional tax and debt repayments. Tapping into the sharing economy could be applied to the provision of public and energy services, whereby the government can use its collective power to direct infrastructure funding towards providing larger fleets of shared electric vehicles, or efficiencies in mega projects.

 

Reimagining the pension system

The UK Treasury’s pledge to achieve the $100bn global green finance target for developed countries by 2023 is not obtainable unless the UK government finds the funds needed to address climate change. Big firms and institutions can only achieve net-zero through increased access to funding by re-imagining the pension system to unlock the trillions of pounds needed for climate infrastructure and electrification of the energy system. Net- zero pensions can help fund plans to ‘build back better’ without increasing the long-term tax or debt burden.

Simon Daniel

By re-imagining economic and pension policies, the UK can offer a financial solution to the problem of finding sufficient capital to fund new infrastructure and new jobs which are needed to solve the climate emergency.

Typically, over a seventh of an individual’s pension income is spent over retirement on energy and travel costs – both of which need to become net-zero services. Assigning a portion of unfunded state pension liabilities could aid this process by encouraging investment in renewables, energy storage, electric vehicles and smart grid infrastructure to ensure energy and travel are delivered as net-zero services. This could ultimately reduce future burden on tax-payers, and ensure net-zero is funded and delivered.

 

The rise of the sharing economy

In return for giving up some of their pension income promise, future pensioners  will be able to claim the right to the provision of low-carbon energy and mobility as a service throughout their retirement. This ensures that they never have to make the daily choice of affordability because of fluctuating energy prices, or worry about the costs of keeping warm.

As the constraints on resources increase, the sharing economy is redefining the modern economy. Whilst the private sector has seen the most innovation in recent years with the rise of Airbnb – which has found new ways to utilise housing and apartments as a more effective resource – public and energy services can also benefit from these same sharing economy concepts. By reimagining pensions, the government can use its collective power to direct infrastructure funding towards larger fleets of shared electric vehicles, or efficiencies in mega projects.

 

Making net-zero pensions mandatory

Defined benefit legislation will allow greater freedoms for scheme managers

and members to opt into net zero services. This will enable them to allocate a proportion of their pension into net zero energy and mobility services. Major companies such as British Airways and BT often trade their obligations as bulk annuities to funders better able to manage their assets for delivery. There is a major opportunity for pension legislation to help schemes enable a partial opt-in to these net zero services.

Large scale delivery via the private and public sector of services such as renewable energy, electric vehicle sharing, and public transport infrastructure access, should begin in the sectors that most contribute to the climate emergency. Major energy, oil, automotive and communication corporations face significant shortfalls in their pension liabilities, yet also often have emerging assets in renewables as well as delivery capabilities that could lend themselves to helping to deliver net zero services.

Pension policies should encourage ESG (Environmental, Sustainable and Governance) targets, tax reliefs and favourable credits for internal scheme shortfalls by providing net zero services to former employees in energy, mobility access and communication, instead of topping up scheme shortfalls from profits. A significant delivery of scheme obligations as services could enable internal investment in renewables, batteries, mobility technologies and jobs.

 

Investing in our energy future

A key opportunity lies in energy provision. Accelerating the provision of low carbon heating and electricity in homes could ensure far lower carbon energy, or even ‘no bills’ housing. Currently, very few homes use low carbon energy, but all new and existing homes need to be low carbon to achieve net zero. Annually, £7.6bn of green energy taxes are charged via Low Carbon Levies on energy bills to incentivise new low carbon infrastructure. Whilst these do help incentivise low carbon, the cost burden falls on those least able to bear it, namely the elderly, and low income workers.

Consumers are beginning to move in the right direction by selecting lower carbon energy providers and installing renewable energy systems such as solar. However, a faster approach that does not rely on consumer choices is vital. Policies should encourage the better release of private finance to help inform the wider opportunity with managed scheme freedoms and opt-ins from public and state pension schemes. This will ensure it’s much better for pension companies to give pensioners LED lighting or solar panels – and work with households to share the risk of improvements – than holding these assets in order to pay out incomes to buy traditional energy supplies.

The government needs to reallocate a proportion of unfunded state and defined benefit pensions to help fund debt and build low carbon infrastructure. This will enable the state to produce greener energy and deliver it back to future pensioners in the form of energy as a service. The generations that fuelled the climate crisis have the opportunity to be a part of the solution by providing the trillions needed for a zero carbon world.

 

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