Most of us don’t know we can change our retirement pot to fit our morals – but here’s how.
Giving to charity and trying to reduce carbon emissions are common ways of being more ethical – but few realise you can also help make the world a better place with your pension pot.
For example, almost half of savers do not realise their pension can be made environmentally friendly, according to research by insurer Scottish Widows. Around two-thirds do not know how sustainable their pension is.
But you may be able to make your pension more ethical, depending on the type of pension you have.
Most working-age people have been auto-enrolled into a workplace defined contribution (DC) pension fund. Around 90% of savers end up in the ‘one-size-fits-all’ default investment option and never make changes to their pension’s investments.
This means your pension cash might end up being invested in things you are uncomfortable with, such as tobacco, alcohol, gambling, animal farming, weapons manufacture and more.
Making a change
If you are in the default option of a fund, check to see if your pension provider takes ethical, social and governance (ESG) risks such as climate change into account. Many pension providers are slowly making their default funds more ethical, but some are going much further than others.
For example, the government-backed pension provider, Nest, is changing its default fund portfolio to reach net zero carbon emissions by 2050 and invest in climate change solutions.
A good starting point for savers is to think about what ESG actually means to them, says Romi Savova, chief executive of pension consolidator PensionBee.
“There are broadly two options with ESG: engagement and exclusion,” she says. “Both approaches have advantages and disadvantages.
“Exclusion means you simply exclude the things such as tobacco or fossil fuels that you don't believe have a place in your pension because of your ethical views. But once you exclude something, you lose your shareholder voice in those companies. And so, increasingly, pension trustees and pension companies are expected to take a more active role in the ownership of the underlying investments.”
Every major pension provider has their own policy around how they engage with their shareholdings.
Check what companies your pension fund is invested in, as pension providers’ websites should have a fact sheet showing their top holdings.
“Most people can expect to be invested in the largest companies such as the FTSE 100. Ask yourself if you are happy being invested in these large companies.”
To check how committed your pension scheme or provider is to ESG issues, you could look at the reports from the Chair of Trustees or the Independent Governance Committee, says Henry Tapper, chief executive of pension analysis company AgeWage.
“If you don't feel they're taking ESG seriously, the ShareAction website is a great place to learn about which pension funds and fund managers are good on ESG. They will also be able to answer any questions.”
The Good Money Guide is another helpful source of information for consumers around ESG investments, says Savova.
If you think your pension fund’s default option is not ethical enough for you, you can choose dedicated ESG investment funds to add into your pension pot.
Most pension providers will have a whole range of additional funds to select from which are not featured in the default fund.
But beware that many ESG fund fees cost more than conventional ones, warns Tapper.
Pension savers could also consider investing in sharia-compliant investment funds. These are often overlooked but are very good on ESG factors as they typically exclude investments in sectors such as tobacco, alcohol, gambling, and military equipment, for religious reasons.
A self-invested personal pension (SIPP) offers a lot more choice when it comes to ESG as it can be tailored to suit your own investment beliefs.
SIPPs are a good option for people who have some experience of investing, work for themselves and do not have company pension contributions. People who already have a company pension fund could open a Sipp – but be aware that your employer may not agree to make contributions.
“With your current workplace pension, you should stick to what your employer is offering if you want to continue to receive those valuable contributions,” says Savova.
If you have moved jobs a lot, it is likely you will have built up several different pension funds.
“If you can’t get satisfaction from your existing pension providers, you could consider moving your old pension funds from previous employers away from workplace pensions and consolidate them in PensionBee,” says Tapper.
A common belief about ethical investing is that returns are lower than standard, non-ethical investing options.
But research by interactive investor (ii) shows this is a myth.
In March, ii found ethical funds fared better during the first three months of 2020 than their non-ethical rivals.
Four out of six ethical funds produced better returns than their in-house stablemates in this period.
The same is true over longer periods.
- Ethical funds fare better amid coronavirus sell-off
- How to be an ethical saver
- Take control of your retirement planning with our award-winning, low-cost Self-Invested Personal Pension (SIPP)
Five out of six ethical funds produced superior returns than their non-ethical alternatives over three years, four out of five over five years and two out of three over 10 years.
New technology is also springing up to help make pensions more ethical.
Fintech company Tumelo gives pension customers more transparency over the companies they own, and allows them a shareholder voice on issues they care about, such as climate change, workplace diversity and human rights.
It means pension savers have a say on shareholder proposals coming up at company annual general meetings and allows them to suggest questions that their fund managers can ask in the course of company engagements.
Currently Legal & General is the only big pension provider signed up. However, other major pension providers are expected to join.
“When you get involved as a shareholder, you're really able to voice the things that are important at specific companies,” says Georgia Stewart, chief executive of Tumelo.
“We help to connect you with the people who do have power to make change and have your voice heard as a shareholder.”
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.