Defined Contribution  

Providers missing out on £1.2bn ESG pension boost

Providers missing out on £1.2bn ESG pension boost

Young savers would boost their pension contributions to the tune of £1.2bn if providers gave more attention to responsible investment considerations in their products, according to new data.

The research, where asset manager Franklin Templeton and research company Adoreboard used artificial intelligence to measure savers’ emotional response to these topics, showed 45 per cent of millennials would be willing to make these additional contributions.

Some 51 per cent believed responsible investment should be built into the provider’s default investment fund.

Of those willing to make additional contributions, over 70 per cent would contribute an extra 1-3 per cent of their salary per month, while 14 per cent would contribute an additional 4-5 per cent.

Combined, this would mean a boost of up to £1.2bn per year, and up to £12bn over the next decade.

The calculations are based on a total of 6.21m defined contribution savers aged between 22 and 39 years old, earning the median salary of £28,086 a year.

According to data from the Office for National Statistics, UK employees paid £7bn into workplace DC schemes in 2018, meaning additional contributions through responsible investment solutions could account for an almost 20 per cent rise in annual employee contributions.

David Whitehair, head of UK DC at Franklin Templeton, said the pensions industry needs to stop seeing savers as statistics and better understand them as people.

He said: “Through better aligning themselves with topics their members are passionate about, schemes can help to drive engagement and ultimately look to boost contribution rates.

“Our findings show that responsible investment could go some way towards bridging this gap.”

The asset manager is therefore encouraging providers to consider how responsible investment, in “its many forms, can be incorporated into their DC investment design, particularly the default investment”, Mr Whitehair noted.

He added: “If responsible investment is more effectively integrated into DC investment design, it could serve the purpose of providing a significant boost to pension contributions, better engaging generation DC in their retirement savings and also providing additional capital for sustainable investment projects globally.”

Some providers are aware of this trend, with Aviva launching a DC default fund which incorporates ethical, environmental, social and governance considerations in July.

The report makes several suggestions on how providers could empower savers to increase their contributions, such as making the process to increase pension payments easier, as “too often it is an arduous process that puts people off”.

Franklin Templeton is also suggesting that providers should assess how appropriate their various ethical funds are to the specific concerns of the younger savers, and include other investment options such as impact funds.

Pension companies should also consider innovative ways to support people in this area, such as ‘round-up’ contribution models, it concluded.

Gem Durham, independent financial adviser at Obsidian, has seen a big increase in the number of clients who want to use ethical funds. 

She said: “Typically I have had perhaps one client a year that expresses this preference. This year I have had five so far, and all are under 50. I’m also more aware and I’m talking about it more.”