Understanding what your client means by 'ESG'

This article is part of
Guide to pensions and ESG

Understanding what your client means by 'ESG'
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In recent years, the former Bank of England governor Mark Carney has been saying something the industry has known for some time but in some quarters had struggled to accept; that consumers are going to become increasingly interested in where their pension money is invested.

During a speech last year at a Make My Money Matter event, Carney said that pension funds realised that addressing climate change was in their interest as climate risk is investment risk, and pension funds would need to provide answers for when people asked whether their money was being invested in line with their values – for example, in line with the transition to net zero.

Yet, currently, many people do not seem to be aware they can make active choices regarding their pension investments, or they are choosing not to make them.

According to data from The Pensions Regulator, in 2020 95 per cent of clients remained inside the default strategy or funds of their UK pension schemes, up from 90 per cent in 2019.

Defaults vs Sipps

Dominic James Murray, director at Cameron James, says this is one of the biggest problems with the UK pension industry, where very few clients have an active relationship with their money.

He says: “I do not believe that the UK asset managers or trustees want clients to have an active relationship with their pension money. It is easier for them and also allows them to place clients in default strategies, which are typically more expensive and profitable for them than if the client was involved and bought funds themselves individually. 

“For example, you may have an XYZ pension scheme balanced portfolio at 0.75 per cent a year, which does not sound expensive or unreasonable to a layman client. 

“However, this portfolio has often simply been white labelled and the real cost of his portfolio is maybe 0.10 per cent – 0.40 per cent a year. This is a huge mark-up, and can negatively affect a client's long-term portfolio performance.”

This is why a self-invested pension plan is more suitable for those saving for their pension because of the flexibility and autonomy it brings, James Murray notes.

“The majority of clients would be far better suited with a Sipp, which would allow them to have full investment freedom and choice, and choose some of the best-performing and lowest cost funds available in the market, including access to environmental, social and governance funds,” he adds.

“A Sipp can be managed individually by a client, if they feel like they have the confidence to do so, alternatively, they can contact an independent financial adviser to help them manage the Sipp.”

Kate Capocci, co-manager of the sustainable managed portfolio service at Tilney Smith & Williamson, agrees: “Most people can make active choices about their pensions. With standard workplace pensions you can often ask for your funds to be managed in one of the sustainable strategies. There is, of course, more flexibility in structures like Sipps to further define how you want your portfolio to be managed.”