Where is My Pension Being Invested?
A growing sense of social responsibility and increasing climate awareness has seen many people looking to shift their investment portfolios towards ethical and ESG (environmental, social and governance) funds.
However, often people don’t realise that their pensions are being invested in ways that contradict these actions. If you are in a defined contribution pension scheme, then it may be the case that your money is being invested in companies that don’t align with your values and the positive choices you make in your day-to-day life. You may be cutting down on long-haul flights and reducing the amount of meat in your diet, whilst unknowingly investing in tobacco, arms and fossil fuels.
How do pension investments work?
When you join a defined contribution scheme (sometimes called a ‘money purchase’ scheme), the payments made by yourself and your employer are placed in a fund. This fund is invested on your behalf by your pension company, providing you with an income upon your retirement. Generally, your pension scheme trustee will make ‘riskier’ investments when you are younger, gradually shifting your portfolio towards ‘safer’ investments as you near retirement. The income you eventually receive depends on how well your fund has performed.
Where are my pensions being invested?
If you don’t specify with your pension provider, your money will normally be placed in a ‘default’ fund. Often these funds simply follow an index (such as FTSE 100), meaning your pension payments are automatically invested in oil, tobacco and other top–performing companies.
Many providers do offer ‘ethical’ funds and ‘religious’ funds as options for people wishing to align their pension with their values, although over 90% of people with a workplace pension stay with the ‘default’ fund. What’s more, fossil fuels are often left untouched in ethical funds, meaning your pension pot could still be invested in mining corporations and major oil companies.
Could my pension be more responsibly invested?
FTSE and many other indices traditionally used by pension providers offer ‘fossil fuel free’ indices. Whilst it remains at the discretion of pension funds to follow these indices instead, the pressure is being put upon many providers by individuals and advocacy groups such as Make My Money Matter. According to the group, ‘moving to a more sustainable fund can have 27 times as much impact in reducing your carbon footprint than flying and becoming a vegan combined.’
In July, National Employment Savings Trust (Nest), the UK’s biggest pension provider pledged to divest from fossil fuels, instead, diverting £5.5bn worth of investments towards ‘carbon aware’ companies. The government-backed body has barred companies such as BP from Nest holdings, as long as they continue to profit from coal mining, putting pressure on companies to reconsider their ethical and environmental policies.
Will my returns be lower if I invest my pension ethically?
Switching to a more ethical pension investment plan doesn’t necessarily mean reducing your returns. In 2015, MSCI found that for five years, fossil fuel–free investors saw returns of an average of 1.2% higher than other investors. Between 2016 and 2019, ethical funds outperformed traditional funds. Furthermore, the global shift in favour towards more sustainable, ethical practice, means that companies failing to reconsider their ESG policies could face government regulation and financial penalties, damaging their performance.
Please note that past performance is no guide to future performance.
What can I do?
Your employer should provide more details on your pension provider if you ask. They may be able to give you a contact for your pension scheme trustee or advisers, who can clarify where your money is being invested.
Seeking financial advice may also help to answer some of your questions about ethical and socially responsible investing. The many variables affecting retirement income mean that decisions surrounding your later-life finances may often be hard to navigate.
If you would like to talk to a member of the team here at gpfm, please don’t hesitate to get in touch over email at firstname.lastname@example.org or call 01992 500261.
This article is for information only and must not be considered as financial advice. We always recommend that you seek independent financial advice before making any financial decisions.
gpfm are an independent financial planning company dedicated to the provision of personal, professional, and objective-driven advice for our clients. We have been awarded the Chartered Financial Planners title by the Chartered Insurance Institute for offering high quality, independent and informed advice that meets the needs of our clients.