In Focus: Retirement Income  

Pension tension - and how to relieve it

Mike Hampson

Mike Hampson

Did you know: more than seven in 10 people in Britain would opt for a fully or partially sustainable pension if they had the choice?

That’s according to workplace pension scheme Nest, which was set up by the Government. Nest has also found  that 68 per cent of UK savers want their investments to consider people and the planet alongside profits.

Green pensions are becoming increasingly popular – almost a fifth of UK savers are choosing an environmentally friendly pension product.

This yields two significant benefits. First is that it ensures responsible companies are backed by the cash they need to help make the world greener and more sustainable.

Second, pension savings are likely to be safer in the long-term when invested in firms that are prepared for climate change and similar risks. 

The UK Government during the recent summit has said it will push ahead with plans to make pension schemes mitigate against risks related to climate change.

The new legislation will make the UK the first G7 economy in which trustees of pension schemes are required to report on the financial risks of climate change.

The pensions industry is no exception and investors (i.e. pension managers/funds) will be increasingly scrutinised on their investment choices, and managers will naturally gravitate towards more acceptable adoptions. 

What does this mean for people's pension choices?

Investing money into funds, which can help address climate change and sustainability issues, is more critical than ever.

A recent survey by Aviva found 71 per cent of millennials would invest in an environmental, social, and governance (ESG) /ethical-focused fund through their workplace pension (if it were available and easy to do so).

It's this same group who are most concerned about climate change. 

The survey also found of those due to retire in the 2050s (aged 25-34 today), 77 per cent are worried about climate change. But only 37 per cent of the people surveyed know that their pension can play a crucial role in tackling this imminent issue.

Picking the correct type of investment is the key here. Once you've done that, you can start to consider fund choices. As of August 2020, about 300 sustainable and responsible funds were available to retail investors in the UK, ranging from actively managed to passive index trackers.

Ethical investment - a work in progress

An 'ethical' pension fund aims to achieve positive returns while screening companies involved in harmful or exploitative activities. Ethical investing generally excludes investments such as alcohol, tobacco, armaments, gambling, and pornography. 

There are already pension funds providing ethical choices for consumers so they can make positive choices themselves already. 

There are many ethical funds on offer, and several styles are available, ranging from ESG - environmental, social, and good corporate governance - to SRI - socially responsible investing. 

These investment styles are an increasingly popular choice among younger retail investors, with green bank, Triodos finding that 78 per cent of those aged 18 to 24 have been prompted to consider where their money is being invested in response to the climate emergency.