In our previous blog, we set out the things you might think about when choosing a new workplace pension scheme for your company. But are you considering ESG (the ethical, social and governance implications) when looking for a new workplace pension provider? This article helps you choose an ethical workplace pension scheme.
Although many people don’t realise it, pensions are a form of investment. Where our money is put into industries like arms, tobacco, or oil, it can have a negative impact on planet and people. ESG is rapidly gaining importance in the investment world, including the pensions industry. High profile campaigns like Make My Money Matter, spearheaded by film director Richard Curtis, are raising awareness of the potential impact of our savings.
So, ethical investment might well be high on your employees’ agenda. Giving them a pension that includes ESG options, or adheres to certain standards, could make them feel happier with your pension provision. Additionally, considering ESG as part of your workplace pension could help make your business more ethical and sustainable, boosting both workforce and brand loyalty.
Our previous post set out three types of pension provider: auto-enrolment focused master trusts, pension providers focused on medium to large companies, and new pension providers. In this article, we set out how ESG considerations might influence your choice of a new provider within this framework.
Auto-enrolment focused master trusts
With a standardised proposition, it might seem like the huge auto-enrolment master trusts might not be the best choice for ESG investment. However, in recent years, some providers have started to adjust their practices to become more ethical. Most auto-enrolment providers already give members the option to switch their investment to a more ethical fund (with the exception of NOW:Pensions, which requires members to remain in the default fund). However, switching out of a provider’s default fund may not be the best choice for everyone.
A 2020 report by the Defined Contribution Investment Forum found that since 2017, many more master trusts have increased ESG allocations in the default fund (8/18 surveyed). It’s worth checking with a provider before signing up if ESG is important to you and your employees.
For example, you might want to check if your potential provider has signed up to a ‘Net Zero’ agreement to bring down their carbon footprint. NEST has already made this commitment, as have Smart Pension , NOW:Pensions, and others. The People’s Pension has a renewable investment policy.
Pension providers focused on medium to large companies
Pension providers who specialise in schemes for medium to large companies can provide more investment options for members, as well as a slightly easier digital experience, making it quicker to change funds. As such, it can be a smoother process to switch investments to ESG funds if desired.
As with auto-enrolment focused master trusts, many pension providers who specialise in schemes for medium to large companies have also made Net Zero pledges. Aviva, Scottish Widows, Fidelity, Aegon and others have committed to bringing their carbon emissions across pension default funds down to zero by 2050.
New pension providers
As newer businesses, the fresh faces on the pension block tend to have solid ESG and other socially responsible investment options built in from the start. Cushon already offers a Net Zero pension, so you don’t have to wait until 2050, and has partnered with ethical voting company Tumelo to help you influence decision-making at the companies you’re invested in. Penfold offers an ethical option, while Collegia describes its approach as ‘bottom-up integration of ESG…factors in all the research and investment processes’.
In many ways, the new providers are therefore ahead of their older competitors. But it’s worth balancing this against the potential for higher fees for members, as newer pension providers can be more expensive.
Things to consider
Whichever pension provider you go with, it’s important that employees understand the potential risks and benefits of switching investments. In recent years, ESG funds have been performing well, and as providers build more ESG investments into their default funds, thereby putting more money into this sector, it may well continue to grow. However, ESG funds can have higher fees than other fund types, so if employees want to move their money out of their default fund, they need to be aware of the potentially higher cost.