A pension fund entrusted with the savings of ten million Britons may have helped fuel the global cost of living crisis by investing more than half-a-billion pounds in financial products, a new investigation has found.

The findings are part of a Europe-wide probe into pension funds’ investments in commodity derivatives. Analysis of European pension funds by Lighthouse Reports shows that more than €30bn is tied up in these funds, which are used to bet on the price of raw materials like food and fuel.

Most of the top UK pension funds surveyed – including those of BP, HSBC and Barclays – do not invest in commodity derivatives. But the Universities Superannuation Scheme (USS) and the National Employment Savings Trust (Nest) together hold more than £2bn in the products.

Nick Dearden, the director of campaign group Global Justice Now, said that pension funds were “gambling on food prices, in the process driving up those prices and fuelling the cost of living crisis for all of us.”

He warned that the speculation would subject the food system “to the law of the casino”, adding that “this is no way to run our pensions, and no way to decide who gets to eat and who doesn’t.”

Nest more than doubled the amount it invests in commodities over a two-year span, from £275m in December 2019. By December 2021, it had £657m invested in commodities, of which the company reports having roughly £160m invested in food commodities like wheat, rice and soy.

The USS holds £1.5bn in commodity derivatives. It said food commodities make up a minimal proportion of this.

Jayati Ghosh, a professor of economics at the University of Massachusetts Amherst, said it was “egregious” for pension funds to invest in these products because they worked against the interests of their members. “These are funds set up by workers and they have their money from workers, and then they're engaging in actions which destroy the living standards of those workers,” she said.

Ghosh added that the ultimate impact – rising prices and a cost of living crisis – is likely to be the same regardless of whether the pension funds are investing in food or other commodities like fuel.

“Whether it is in food or energy, both are equivalently terrible from the point of view of workers and developing countries because a fuel price increase translates into all other prices going up,” said Ghosh.

A spokesperson for USS said that its annual allocations to commodities has reduced from 1.15% to 0.08% over the past three years.

A Nest spokesperson said that commodities only made up 2.8% of its total investments: “While our exposure to agriculture commodities provides a useful diversifier for our members, these contracts play a small role in our investment strategy.”

‘A wall of money’

Last week the UN body for trade and development, UNCTAD, warned of a policy-induced global recession in its annual trade review. It said that insufficient attention had been paid to the “betting frenzies” on the futures markets in the current crisis, and called on governments to tighten rules on speculation and “as part of their policy mix to curb price spikes that are hitting consumers in the developing world hard.“

Futures markets were invented as places where companies dealing in raw materials could limit their risk to price fluctuations. By taking a short position on wheat, for instance, a farmer could mitigate the risk of future price increases.

Speculators – who don't have a commercial interest in raw materials, but bet on the price of them – have traditionally played an important function, ensuring there was enough liquidity for the commercial players to hedge their risks.

But market deregulation in the year 2000 led to new classes of speculators entering the market: among them pension funds.

Ann Pettifor, an economist and writer, says the large amounts of speculative money has changed these markets: “Take an asset which is finite – whether it be grain, property or energy – when a wall of money is aimed at that finite asset, the wall of money inflates the price.

“This wall of money consists of… pension funds, asset management funds, hedge funds, and private equity. All of our savings has been pumped into the global market, and it's chasing assets wherever it can fall.”

Richard Kozul-Wright, co-author of the UNCTAD report released last week, says that a ratio of 70% hedgers and 30% speculators is "healthy". But, he said: “What we see in the market indicates that that ratio has been reversed: 70% speculators and 30% real hedgers.”

According to Yaneer Bar-Yam, professor and founder of New England Complex Systems Institute, an independent American research institution, investors such as pension funds have stopped the commodities market from following the fundamentals of supply and demand.

Bar-Yam co-authored a 2011 paper that showed speculation was a primary cause of food price increases.

Pensions defence

Some pension funds explicitly reject investments in commodities on ethical grounds. Others, like Nest, started investing in commodities to protect themselves from inflation, as explicitly stated in the fund’s 2018 annual report. But experts say this strategy can be self-defeating, since the investments themselves help to drive inflation.

Other pension funds have defended their investments on different grounds.

ABP, a Dutch pension fund whose commodity investments dwarf those of Nest and USS, said: “Trading in commodity futures has no upward effect on prices, not even in the market for agricultural commodities. This view is supported by academic research.”

Dave Whitcomb, founder of Peak Trading Research, which focuses on commodity markets, disputes this position. Whitcomb, a former commodity trader for Cargill, one of the world’s largest grain traders, said: “I would argue that that would be a very exceptional market where buying doesn't drive prices.”

Bar-Yam also dismissed this defence. “The science is very clear that trading does have upward effects on prices,” he said, adding that claims to the contrary “are counter to the manifest role of buying and selling in commodity price-setting markets and validated predictions using quantitative models”.

Ultimately, he said pension funds’ investments in food commodities are “undermining their mission as advocates for the public good.”

This investigation was coordinated by Lighthouse Reports in collaboration with EU Observer, Follow the Money (NL), Apache (Belgium), OpenDemocracy (UK), El Diario (ES), Il Bo Live (IT), LongPlay (FI)