What ESG-focused pension options are available to employees?

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.

For a lot of strategies, it’s about moving to a net zero position over time.Dan Smith, Fidelity International

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 an industry, we can’t just sit back and be passive.Ryan Medlock, Royal London

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.” 

He adds: “For those members who have very specific interests, there are many solutions available via self-select funds.”

Smith says it is worth noting that nearly all investments have an ESG impact, as “for members, it’s about where each fund is on the spectrum for E,S and G. Armed with this information, members who want to take a sustainable or ethical interest in their investments can do so”.

For Ryan Medlock, Royal London’s senior investment development manager, there are a variety of solutions available to employees who want a particular focus on ESG integration or stewardship. He says: “There are new solutions continuing to launch on a regular basis marketed as either ‘sustainable’ or ‘responsible’, and I applaud the collective innovation in this area.”

Many defaults these days have started to integrate ESG or climate into the underlying assets.Brian Henderson, Mercer

However, Medlock notes this often comes at an additional cost for the consumer and the industry. Consequently, this approach might lose many customers who would otherwise have been keen or able to afford these strategies if they were made more easily accessible. He says: “We cannot afford to turn responsible investment into an exclusive club which prices some customers out.”

Medlock adds that in a regulatory era where the focus is increasingly being placed on a duty to provide positive consumer outcomes, moving into higher-charged funds goes against the grain.

“As an industry, we can’t just sit back and be passive," Medlock says. "Product manufacturers should be implementing ESG integration techniques into investment processes and exercising their stewardship responsibilities as standard and transparently.”

Two routes to investment

Brian Henderson, partner and head of sustainable investment at Mercer, says that for those with company-based DC schemes there are two routes available to invest.

He says: “Firstly, in line with the majority of DC savers, the default option is the first place to look. Many defaults these days have started to integrate ESG or climate into the underlying assets, or have dedicated investments through an ESG or climate fund. 

“Secondly, some schemes offer members self-select options that are ESG-related. If neither are sufficient for the member, they may want to request if there is an option to transfer their savings to a provider who does offer what they are looking for.”

Ruth Gillbe is a freelance journalist