DC members want better access to ESG investment strategies

New research from Buck has found that more than two-thirds (67 per cent) of companies now expect ESG criteria to be included in their pension scheme investment choices. 

The findings are part of Buck’s new white paper on employer attitudes towards defined contribution pension schemes, DC pensions: The big picture. 

Rapidly changing landscape 

In 2018, only 28 per cent of respondents expected ESG criteria to be included in their pension scheme investment choices, demonstrating the significant shift in attitudes that has taken place over a period of four years. 

Companies that believe their schemes are aligned with their corporate values should also review their arrangements regularly

Mercer report

This trend in DC pension scheme investment reflects a wider change as companies continue to develop their corporate social responsibility policies and seek to promote cultures that embrace diversity, equity and inclusion. 

The report showed that almost half (44 per cent) support ESG provisions, and 44 per cent said that even the default fund should incorporate ESG principles. 

Almost two-thirds (60 per cent) of respondents also said members should be able to choose investment options that reflect their religious or social beliefs. 

Buck benefits consulting leader Mark Pemberthy said: “It’s encouraging to see that workplace DC pension schemes in the UK are taking steps to reflect this changing sentiment. 

“Communicating ESG-related activity can also be a fantastic way to increase engagement among scheme members. Pension schemes can use front-page news, like climate change, to link the real world impact of their investment strategy, making it more tangible for members. 

“Tech-enabled impact and voting tools are also a fantastic way to bring this to life, boost engagement and get real insight on what is important to members.”

Inertia remains a powerful force in DC

Despite the increased interest in ESG and sustainability, inertia would appear to remain one of the greatest challenges that continues to face DC pension schemes.

A recent Mercer report found that while the DC marketplace has moved significantly in recent years, little has changed at many schemes.

DC members can now expect lower charges, better service, improved governance and new savings options, but more than half (57 per cent) of employers surveyed by Mercer have not reviewed their default investment strategy in the past 12 months. Worse still, a quarter (25 per cent) have not reviewed it in the past three years. 

As a result, members may be missing out on many investment opportunities, not just the choice of sustainable strategies.

Studies across the market have show that increasing costs are encouraging members to opt out of pension contributions. Mercer’s data showed that this may result in an 18 per cent reduction in projected pensions, translating into a 10 per cent cut in their net annual pension income.

And yet, more than half of employers have not reviewed the charges paid by themselves or staff in the past two years, and a fifth (20 per cent) are not using salary sacrifice. Even when they do use it, the survey found that many are not using it efficiently, increase the tax burden on both the employer and employee.

More than keeping the customers satisfied

The choice of ESG/sustainable options is not merely a sop to satisfy members. The employer’s reputation is increasingly at risk from campaigners who consider the investment options to be environmentally damaging.

Customers as well as employees are also increasingly concerned that the businesses they interact with have values that are aligned with their own.  

“The environment is a matter of concern to employees. Your people expect you to do the right thing as they try to reduce their own environmental impact,” the authors of the Mercer report wrote. 

“Pension schemes are significant entities. Some employers’ schemes are larger than the company’s market capitalisation and for many employees their pension is their biggest investment.

“If your scheme’s investments are not aligned with the energy transition, it risks holding obsolete assets and missing out on opportunities.” 

Another Mercer report on responsible investing found that only 38 per cent of DC schemes include an ESG fund in their default investment strategy. 

“Companies that believe their schemes are aligned with their corporate values should also review their arrangements regularly,” the report said. 

“Most trust-based schemes have more work to do and, if you have passed responsibility to a [group personal pension] or a master trust, you should check their behaviour and policies.”