Politics can struggle to look past the next week. Fortunately, others must. Take pension funds, for example. Today’s youngest pension savers will retire into the world in 2070. What’s that world going to look like?

Capital shapes the world around us. It finances our homes, our jobs, and the goods we consume. And UK pension funds sit on a lot of this capital; £2.5tn in total, equivalent to the size of the entire UK stock market or the annual GDP of France.

So how that money is allocated, and for whose interests, is rather important.

More than 80 per cent of UK pension holders want their savings invested in ways that benefit the society they live in — and the places they will one day retire to. Government, too, wants pension capital backing domestic priorities like growth, innovation and infrastructure. But outdated laws are holding pension funds back from making this a reality.

The effect is stark. The UK has underinvested for decades, with investment rates three percentage points below the OECD average, putting our capital gap at several trillions of pounds. And it’s unequal. The UK’s geographical inequalities today are more severe than at any other time since the second world war. Great if you’re a wealthy Londoner; less good for everyone else.

Pensions could do more to address this. But at the heart of the problem is fiduciary duty. This core legal principle requires pension trustees to act in the best interests of members. Yet in practice, most decision-making is stuck in a narrow frame: best interest is interpreted to mean financial interest alone, and even that is understood in overly short-term horizons.

That feels like a strangely two-dimensional view. It assumes that our pension funds only matter at the point of our retirement, without considering the effect they have on our quality of life along the way. And it supposes that short-term decisions do not have long-term implications — but all our financial futures are linked to the society we will grow old in.

That means paying attention to wider factors like resilient energy sources, secure housing, better public services, and a strong UK economy.

While the law does not bar trustees from considering these wider factors, ambiguity about how far they can go has left many cautious.

The good news is that a fix is within reach.

Last week, the House of Commons debated a widely supported, cross-party amendment to the pension schemes bill. Drawing on work by leading legal minds — from Freshfields to the Law Commission to the Financial Markets Law Committee — it sets out two simple changes that would give pension fund trustees the confidence to act.

The first change is to provide clarity that pension funds can recognise economy-wide risks. Long-term investors cannot divest their way out of climate change or economic stagnation. Rather, these challenges need solutions-focused capital to tackle them head-on.

The second change is to permit pension funds to consider the real-world impacts of their allocations. Surprisingly, they do not have to. But there is little point in channelling capital to investments that make your members’ lives worse.

Some argue that these changes are unnecessary, and that the law already allows these considerations. Fine. They shouldn’t mind clarification of that fact. Others argue that this is a form of ‘woke’ capital, engineering social outcomes through regulatory means. But these changes wouldn’t mandate where capital goes. Instead, they would enable trustees to better align investment decisions with the long-term interests of their members.

The best part is that leading pension funds are already doing this. Nest, the auto-enrolment scheme with more than 13mn members, now has a ‘climate aware’ approach with all of its equity funds.

Border to Coast, one of the UK’s largest local government pension pools, has launched a £500mn UK Opportunities fund to channel productive finance into social and affordable housing.

Scottish Widows, a 200-year-old pension provider managing more than £230bn in assets, assesses the social outcomes of its UK infrastructure lending to help protect returns in the long term.

There are plenty of other leaders, too. The opportunity now is for the rest of the UK’s 8,000 pension funds to catch up. Without legal clarity, they won’t.

A change to the law would also ensure consistency across all scheme types — trust-based occupational pension schemes, workplace personal pensions and the Local Government Pension Scheme.

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