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Auto enrolment has increased pension membership, and now the UK has a combined master trust pension pot of £38.5 billion. While more of us are saving for retirement, in 2019, 95% of the UK’s 16.6 million defined contribution pension scheme members were invested in their scheme’s default strategy.
Default options often appeal to investors who are less confident making decisions about their finances, or who want a ‘hands off’ approach. Or perhaps more accurately, it is because people have never looked past the fact that they’re paying into a pension and changed where their funds are invested.
The disadvantage of the default option is that an employer’s default pension fund is chosen to suit the average staff member. It’s the equivalent of giving everyone a medium-sized shirt. It won’t fit everyone and now that people are becoming more aware of their ability to demand change for an investment solution that suits their values and they’re shocked to know that they’re investing in industries that they would ordinarily oppose, such as tobacco, fossil fuels or palm oil.
Understanding the impact of your investment decisions
This was brought into sharp focus for Australian oncologist, Dr Browyn King. In a widely-viewed TED Talk (TED Talks are influential videos from expert speakers on education, business, science, tech and creativity), she talks about the day she took a moment from her job battling the effects of cancer to learn about her pension, and discovered she was investing in tobacco.I’m sitting at the hospital cafeteria, having my first ever meeting with a representative from my superannuation (pension) fund. He tells me I’m in the default option. And I said, “Option? Does that mean there are other options?”
He looked at me, rolled his eyes, and said, “Well, there is this one greenie option for people who have a problem with investing in mining, alcohol or tobacco.”
I said, “Did you just say tobacco?”
He said, “Yes.”
I said, “So, are you telling me I’m currently investing in tobacco?”
When you invest in a company, you own part of that company. You want that company to grow and succeed and thrive. You want that company to attract new customers, you want that company to sell more of its products. And when it comes to tobacco, I couldn’t think of anything that I wanted less.”Browyn took immediate action to disinvest her retirement savings from that fund and to move to another that excluded tobacco. She now advocates for major financial organisation to move to tobacco-free funds.
2020 – a year of much change
2020 saw a lot of investors view the world through the same lens as Dr King, and this change has been bubbling away for a few years from concept to action.
In 2016, Legal & General Investment Management surveyed 1,600 pension scheme members and found that 81% want their pension scheme to be invested in companies with advanced social and environmental practices.
Figures from the Investment Association published in November showed that responsible investment funds saw net flows of £7.1 billion in the nine months up to September – nearly four times the £1.9 billion seen for the same period over 2019.
The challenge for those in charge of workplace pensions is to meet demand by finding environmental, social and governance (ESG) solutions and then communicate that change to their members. This is made more complicated by the different ethical viewpoints of employees – no two people see the world the same way.
The reporting challenge
It is difficult for providers to quantify a fund’s effect on people and planet in a consistent manner. There are already several different matrixes rating funds’ ethical credentials, but no single source of authority, so it’s not really comparing apples with apples.
Furthermore, it also leaves them open to ‘greenwashing’, a process of claiming funds are greener than they are, in order to attract inflows.
The Pensions Bill currently making its way through parliament aims to raise the bar for pension funds to report the climate change impact of their investment portfolios. This is just one part of a series of changes to “update the law to require pension scheme trustees to consider the impacts of their investments from a changing environment, corporate governance and social trends.” This clause requires “occupational pension schemes to manage the effects of climate change effectively as a financial risk to their investments and to report publicly on how they have done so.”
Using empowerment to increase engagement with younger savers
We have broached the subject of needing to increase awareness and engagement of retirement planning many times in the pages of Money Matters. The earlier someone starts displaying the right behaviours, the better chance they have of building a suitable retirement income pot.
This is where ESG has the edge on previous initiatives and it is more likely to capture the attention of younger generations.Moving investments from one seemingly faceless fund into another on the basis of slightly improved performance has been an option for many years but clearly not many have taken it up, hence the 95 per cent of people remaining in their default fund.
However, we live in an activist society now where movements supporting climate change, anti-racism and gender equality are mainstream. It is easier for people to identify those causes and direct their investments that way, rather than learning the fundamentals of stock market performance and identifying future growth areas – that is the preserve of professionals anyway.
Have a conversation with a child or grandchild who is starting their retirement planning journey and encourage them to look underneath the bonnet of the fund is one such option. You could also involve them in considering fund choices for your estate planning. Would your beneficiaries be happy if their inheritance contained funds that include tobacco companies, for example? If the answer to that is no, now is the time to start the conversation with your adviser.Help for scheme trustees who want to report on the contents of their funds and members who want to find out what they’re invested in is likely to come from the investment managers running the pension funds.
One of Wren Sterling’s key partners, Aviva, has been busy in this space, embedding ESG into its default funds and setting itself an ambitious target to be a net-zero insurer by 2040.
Jason Bullmore, Aviva’s Workplace Investment Proposition Lead explains.
Your pension can be a powerful force for good in a world that is increasingly focused on ESG. Taking into account environmental, social and governance (ESG) factors is rightly no longer deemed ‘nice to have’ for pension providers and their default solutions, it’s now a necessity.
In attempting to understand how “ESG” your pension is, individuals should focus on two key areas.
Investment Integration is the way a provider incorporates ESG into their investment processes. Most providers now say they do this, but you should try and establish how committed they really are. Do they have dedicated analysts, and enough of them, to make meaningful ESG decisions? Do they incorporate this expertise into decision-making for active and passive portfolios? Or has the provider outsourced their ESG decision making – using simple screens, and perhaps implementing sector-wide exclusions without consideration of the nuances of different companies?
Active Ownership is how a provider interacts with the companies they own. Ownership confers the right to vote at AGMs and shape corporate policy towards better ESG outcomes. It is also the springboard to meet with company management, explain the changes to corporate behaviour that you require, why these are important, and then to collaborate with them through the process of change. So being invested in a “bad” ESG company can enable us to deliver “good” ESG outcomes.
We believe choosing to partner with a fund manager that shares the same values, namely that as a guardian of people’s money we must act responsibly for the good of the world around us, is the first step in the journey to integrating ESG into a pension.
That’s why – as well as having a net zero carbon goal for 20401 – we work closely with our fund manager partner Aviva Investors, which has a dedicated ESG team.
The team is regarded as a centre of excellence on all responsible investment matters across Aviva Investors and sits alongside the investment team managing My Future Focus, our default solution. This ensures that ESG factors are embedded into the design and management of My Future Focus. Engagement and voting also play a key part of the team’s work; this involves encouraging the businesses that My Future Focus is invested to improve their ESG credentials.
Communicating regularly with customers about such work is crucial for pension providers; it’s only in this way that members can find out that where their contributions are being invested. Relatable examples of engagement will also hopefully encourage members to want to learn more about the world they live in, and how they can help on issues such as climate change, something that we believe investing responsibly should be all about.
At Aviva, we believe that powerful change comes about when you have the information to make decisions, and the means to communicate them. To this end, we have developed sophisticated reports that explain the ESG credentials of your fund. We are also developing an app that allows you to see the companies we own on your behalf, and to advise us how to interact with them.We’ve covered a lot of ground here, but if you or a relative are invested in a default fund, there are a few things you might want to explore:
- Is the default fund right for you? Is the fund invested in the right split of assets to give you the retirement you want?
- What sectors is your default fund invested in?
- Does your default fund provider give you the option to move your funds to an ethical solution?
Of course, any changes you make to your pension investments should be done so with the help of an independent financial adviser, who can capture your ethical preferences and recommend a solution that aligns to your values, as well as your financial planning goals.11st March 2021 – Aviva became the first insurer worldwide to announce a net-zero carbon target by 2040
The value of an investment may fluctuate due to the geographical area and industry sector they invest in, investors may get back less than they originally invested.