With responsible investing becoming increasingly important across many industries, workplace pensions are now having to make sure what they are offering incorporates significant concerns about environmental, social and governance issues, and demonstrates a commitment to this that is focused on that goal.
Money purchase schemes – also called defined contribution schemes – are the most widespread workplace pensions currently on offer.
The pension an employee is entitled to is based on the money paid in, which the employer sometimes matches, and on how the investments perform.
If the employer has to offer auto-enrolment then it also has to make contributions towards these pensions.
Defined benefit schemes – also known as final salary schemes – are not offered as widely on the market.
An employee’s pension entitlement is based on the employee’s wages alongside the number of years an employee has worked at an organisation.
Many advisers still worry they may be hit by complaints over DB transfer advice, according to a recent poll by FTAdviser.
The options for employees who want their funds to have an ESG focus are increasingly prevalent on the market.
Employers need to make more conscientious choices as a result, and enact thorough research to ensure they choose the correct provider for their employees.
As such, providers need to pitch their ESG values and exemplify their good work in this area to attract employers.
ESG as standard
Maria Nazarova-Doyle, head of pension investments and responsible investments at Scottish Widows, says providers can give employers comfort that their pension scheme is invested responsibly by delivering a combination of default investment solutions that integrates ESG considerations as standard.
She says this would “include actively challenging companies it invests in to behave more sustainably and responsibly”.
Nazarova-Doyle adds that this approach, along with “a robust range of sustainable and thematic self-select funds for members who feel comfortable making their own investment decisions”, would help members feel they were investing responsibly and proactively making those choices, as opposed to leaving those choices to others.
Last year 20mn workers participated in a workplace pension, equivalent to a majority of 88 per cent of eligible employees, according to government figures.
As such, employers need to take a serious view on how to attract employees into these pension schemes, and as part of this discussion ESG has an important role to play.
For Dan Smith, head of workplace investing distribution at Fidelity International, transparency on “sustainable credentials” is key, along with how the strategy aims to improve its ESG score, as default solutions are often the most appropriate investment option for members.
Smith says: “For a lot of strategies, it’s about moving to a net zero position over time – for instance, FutureWise, Fidelity’s default strategy, is committed to reducing carbon emissions to half by 2030 and to becoming net zero by 2050 or before.”
