Making ESG part of your pension investments

Taking ESG (environmental, social and governance) factors into consideration when investing is becoming more mainstream. However, many investors that want to make ESG part of their strategy are overlooking their pension.

Pandemic means investors are more likely to consider ESG

ESG investing has slowly been rising in popularity over the last few decades. But the pandemic could help push it into the mainstream. According to Aviva, 55% of investors said that the pandemic has had an impact on their likelihood to consider ESG investments. Eight in ten said the pandemic made ESG factors even more important.

This is supported by the fact that the value of new investments in ESG funds in the six months since March 2020, has more than doubled compared with the preceding six months. Of those who already consider ESG factors, only a third (32%) have been doing this for a year and 49% only started within the last six months.

Alistair McQueen, Head of Savings and Retirement at Aviva, said: “Lockdown may have stopped many things, but what it appears to have kick-started is an interest in using money as a force for good. ESG is growing, fast.”

But pensions are being overlooked

For many of us, our pension will be among our largest investments. Yet, when it comes to ESG it’s being overlooked. It means those interested in ESG factors could be missing a huge opportunity.

The research found that even among those with an interest in ESG, this rarely extended to their pension. Six in ten people with private pensions have not taken any action to change where they invest their money. This includes considering ESG factors, as well as looking at different options to maximise returns.

Just 40% of pension savers that say ESG factors are important have updated their pension.

Given that earlier research has shown a lack of understanding around how pensions work, this oversight isn’t surprising.

Most workers pay into a Defined Contribution pension. This means contributions, along with tax relief and employer contributions, are invested. Once you reach retirement age, you’ll have access to a pension that is dependent on both contributions and investment performance.

Yet, a study found that less than a third of workers knew their Workplace Pension was invested. When questioned further, most people said they had ‘no idea’ what happened with pension contributions. Some did deduce that it may be invested once they thought about it, but others believed it went into a savings account. Many also believed the government is involved in managing their money.

Given that millions of people don’t believe pensions are invested, it’s easy to see why pension management and ESG is being overlooked.

How to consider ESG in your pension

If you’re considering ESG factors in other investments, you may want to review your pension investments. Your options will depend on the type of pension you have.

Most workers will pay into a Defined Contribution Workplace Pension. This is where your money is invested through a fund. However, pension schemes will offer various funds for you to choose from. Usually, this will include an ESG fund, which may be called ‘sustainable’, ‘responsible’ or ‘green’, as well as others that reflect higher or lower risk profiles.

If you’ve never reviewed where your pension is invested, it will be through the default fund. You can switch between the fund options your pension provider offers, often online. However, make sure you understand the risk profiles of each fund and how this reflects your retirement plans, time frame and more first. If you’re interested in ESG, you should also look at what areas the fund focuses on.

If you have a Self-Invested Personal Pension (SIPP) you select the investments and funds your pension savings are invested in yourself. As a result, you have complete control of how ESG factors affect your investment decisions. Before making a change to your pension strategy, it’s advisable you review your risk profile and seek financial advice.

Some workers may also be paying into a Defined Benefit pension. This is where the pension scheme takes responsibility for the investments and your retirement income is defined and guaranteed from the outset. As a result, you have less control over how the scheme invests. However, many are increasingly considering ESG factors and engaging with scheme members on this issue.

Review your pension, even if ESG isn’t a consideration

Even if ESG factors aren’t important to you, it’s important that you review your pension. This includes how it’s invested, the risk profile and whether you’re on track to have enough in retirement. Being engaged with your pension while still paying in can help set you on track for a retirement that meets your expectations.

If you’d like to discuss your pension investments, including ESG factors, please contact us. We’re happy to review your pensions to help align them with your plans and wishes.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.

The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.