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Ethical pensions: How to help employees plan for a better future
From the type of car that we drive to the type of coffee that we drink, we now have an increasing number of ways to align our buying choices with our environmental, social and moral principles.
This trend is underlined by the latest Ethical Consumer Markets Report, a barometer of spending across a wide range of sectors, which claims that ethical consumer spending and finance hit £122bn in the UK in 2021 – a 24% increase on the previous year.
This mindful behaviour is quickly extending beyond the products we purchase and into other financial aspects of our lives, including our pensions, with growing numbers of responsible savers looking to understand more about the funds into which their money is invested.
A push for change
These rising engagement levels have been buoyed by eye-opening figures from those pushing for change. For example, research from campaign group Make My Money Matter, undertaken in partnership with SYSTEMIQ and Global Canopy, makes the claim that £300 billion of UK pension money is invested in companies and financial institutions with a high risk of driving deforestation.
In light of such statistics, employees who previously might not have paid a great deal of attention to how their pensions are invested are more likely to seek assurances that their savings are being used to create more positive impact on the planet.
It’s a direction supported by the government. From October 2021, the trustees of the UK’s largest occupational pension schemes have been required to identify, manage, and report on the climate-related risks and opportunities within their portfolios in measures designed to deliver “a new level of accountability”. The regulations, considered best practice, are expected to filter through to smaller schemes over time as part of a phased introduction.
Turning ethics into action
For individual employees, however, it is not necessarily obvious how to marry their ethical concerns with action. Anyone sufficiently engaged with their retirement planning to have a personal pension will have the autonomy to decide where their money is invested. Many others, however, will be invested in the default funds offered via workplace schemes, potentially through auto-enrolment. What, if anything, can they do to make change happen?
A good starting point is to understand where pension contributions are currently going and to be clear on whether any ethical filters have been applied to those funds. If you are uncomfortable with what you find then, as a next step, you can explore whether there are fund options available within your workplace scheme that are more deliberately focused around ethical or sustainable investing.
More options are emerging into this space, with the introduction of funds pitched as ‘net zero’ or ‘fossil-fuel free’ adding to the ethical or sustainable offerings from large pension providers. What is available to individual employees will depend on how their pension scheme is managed by their employer, underlining the need for ongoing dialogue and communication to get any questions answered and have your voice heard.
Getting into the detail
It is also important to note that there is no singular definition of the word ‘ethical’ and there are a variety of strategies that can be employed in the pursuit of ethical objectives. This can include greater association with companies that demonstrate strong Environmental, Social and Governance (ESG) credentials and/or active disassociation from companies operating in areas that might be perceived as ethically or environmentally unsound, such as tobacco and gambling.
The devil, as ever, is in the detail, which makes it all the more important to be wise to the concepts such as ‘greenwashing’, where environmental labels are loosely applied to products and practices that might not be truly rooted sustainable thinking.
Matters become further complicated by the fact that each of us will be guided by our own view of what is ethical and what is not. Sectors such as defence, for example, might be shunned by some while others will perceive it as more of a grey area. Similarly, individuals are likely to place stronger emphasis on certain positive investment targets ahead of others.
A survey of members carried out by consumer group Which?, for example, found that climate change/environment and good corporate governance were the two areas that people most wanted their pensions to support, backed by 44% and 42% of respondents respectively. This was followed by social issues (28%), workers’ rights (26%) and gender equality issues (16%).
Driving pensions engagement among employees
It’s fair to say that not all employees are sufficiently engaged with their pension to consider it from an ethical perspective. Indeed, according to The Pensions Regulator, the overwhelming majority of members of Defined Contributions schemes invest in default funds, which will not necessarily be shaped by ethical concerns.
Over time, however, there is likely to be an increased appetite for change among a workforce who are increasingly environmentally and socially aware. For employers, helping them navigate this difficult landscape can result in better engagement with their benefits as they look to invest in a better future for themselves and the planet.
Vintage Corporate is experienced at helping employers build tailored employee benefits packages that reflect the needs of a company and its workforce. Contact our team today for further information.
The information contained within this communication does not constitute financial advice and is provided for general information purposes only. No warranty, whether express or implied is given in relation to such information. Vintage Corporate or any of its associated representatives shall not be liable for any technical, editorial, typographical or other errors or omissions within the content of this communication.
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