Overcoming UK Pension Investment Inertia Over ESG

Tom Burroughes Group Editor London 11 April 2022

Overcoming UK Pension Investment Inertia Over ESG

We talk to a new UK business that says it helps holders of pension funds to shift into more sustainable investment approaches without some of the demoralising paperwork and delays that often put people off.

ESG, sustainability, impact investing. Wherever one looks, the terms are everywhere. In fact, if a wealth manager wants to be a bit risqué, and go against the crowd, not having offerings under these titles is the way to go. But by and large every business in the sphere appears to be talking about these ideas. But….the devil is in the detail. Moving investment funds to a more “ESG” or “sustainable” model isn’t always easy. There can be understandable inertia and worries that shifting portfolios will cost money in dealing and related costs. Another nagging concern is whether ESG is going to deliver the goods when a person retires. One such space where inertia is a problem is that of occupational and private pensions. Often heavily regulated and subject to complex tax rules, pensions may not always be a frontline wealth management topic, but many HNW clients use them. Advisors need to pay attention. 

A recently-launched, UK-based firm called The Sustainable Pension Company is trying and make it easier for people to migrate pensions to ESG ways of investing, and swiftly. WealthBriefing talked recently to Andy Harris, commercial director, and Roger Milbourn, investment chairman, about why they set TSPC up, its strategy and their thoughts on the ESG space. Harris has worked in financial services for more than 30 years, 20 of which have been in the independent sector, building and running small to medium IFA practices. Milbourn has worked in financial services for more than two decades as an investment advisor and independent financial planner, with numerous roles in senior management. 

What sort of problems does TSPC aim to solve?
Our research shows that people want a truer alignment of their retirement savings with their personal values, and that they are keen to ‘do their bit’, so we are seeking to move their pension savings from potentially harmful to harmless funds, into investments that are having a net positive impact on the world.

The problem is that pensions are confusing; add in the ‘sustainable/ESG’ overlay and it becomes even more complex. The decision to switch your pension is an important one, and without expert guidance, it is for most people a bridge too far.

Even when people have made the decision to move their funds, the question is how they go about making the switch.

We are committed to educating people, helping them to understand that they can change the way in which their pensions are invested, with ease – enabling them to play their part in addressing the climate crisis and better align their investment approach with their personal values.

We felt it was important to look at constructing our own portfolios, investing in collective funds that look deeper into what companies are doing, whilst including a more impact-based investment approach.

We have worked with a boutique discretionary fund manager in constructing five risk-graded portfolios; each is designed to make a positive impact on the world, without compromising the investment return.

Why did you set up the firm, and when did it go live for clients?
We became aware of, and were motivated by, Make My Money Matter, a people-powered campaign fighting for a world in which we all know where our pension money goes, and where we can demand that it is invested to build a better future. It led us to establish The Sustainable Pension Company, which we launched officially in January this year.

The MMMM campaign was established by the writer and director Richard Curtis, the overarching objective of its campaign being to get big corporate pension schemes to invest in responsible companies, with more sustainable practices.

Make My Money Matter states that moving an average UK pension fund into sustainable investments will have 21x the effect of giving up flying, becoming a vegetarian and switching your energy supplier.

We understand that a lot of savers do not know, truly know, where their old workplace pensions are invested – their active workplace pensions perhaps too. Many would be shocked to discover the sort of companies their pension monies are invested in. Most old-style workplace pensions are passively managed, and many will contain a FTSE100 tracker – and they tend to lean heavily towards fossil fuels – so many investors are automatically invested in the good, the bad and the plain ugly.

Unless a saver is in a specific fund, or a portfolio that focuses on ethical and sustainable investing, by the very nature of risk-rated pension funds, they will be invested in companies that have a negative impact on the planet. One study undertaken last year, by Clim8, shows that half of all UK adults in the UK are completely unaware that their pensions can be potentially harmful.

There is a high chance that your personal values are anything but aligned and it is our mission to help those savers find out where their pensions are invested and to move them to something more appropriate when appropriate.

Whom are you targeting?
Unlike Make My Money Matter, we are targeting individuals, namely those invested in one or more Defined Contributions schemes.

We see our core target markets as the great number of people who are unadvised, who have numerous pensions – typically from previous employers – and who place greater emphasis on investing for good. They are most likely to be in their 30s and 40s and/or at least five years away from retirement.

That said, we are receiving enquiries in these early stages from a broad church.

Quite a few people have asked whether they can transfer a proportion of their pension fund – whether it is a case of all or nothing. Transferring part of your pension is a good starting point, and we are happy to facilitate this.

The greatest positive is perhaps the number of clients who are becoming increasingly aware of the control they have over their own investments, and who are conducting their own independent research into sustainable investing; they are looking at the implications of greenwashing and refusing to settle for a green label.

What’s unique about your offering?
We offer a telephone/video-based service, so are offering a human interface. Most of our competitors are online only.

Our portfolios are all actively managed and go several steps further along the ‘sustainable’ path than most, screening with a fine filter to ensure that we are investing in funds with the most sustainable credentials.

We strive to make it easy and accessible for savers to move their pensions into solutions such as ours, so we take care of the entire process, from start to finish – with charges set to compare favourably with an advisor-led solution.

We take care of all the paperwork and administration and will write to your pension providers to obtain the information we need to be able to advise you. Where appropriate, we can arrange the transfer to TSPC, and the investment into a suitable portfolio.

Why do you think people who have pensions get into a sense of powerlessness and don’t want to move? Are there features of pensions that contribute to this? 
Pensions are a minefield. Most people will leave well alone for fear of doing something they shouldn’t and making a catastrophic error.

Changing bank accounts or energy providers presented significant challenges in the past, and providers knew that. It wasn’t until the switching process was made easier in these fields that people had the confidence to act on their intuition.

At TSPC we aim to give people confidence and to facilitate an easy switch to portfolios which are more aligned with their personal values. The portfolios are risk rated to match clients’ individual circumstances and objectives. They are actively managed and fund managers are monitored on an ongoing basis to ensure that they are delivering their promises.

How much of what you do is about educating clients?
There’s a lot of education required. Sustainable investing is a relatively new concept – and it can be highly subjective. Our aim is to make things clearer, so people gain confidence and feel enabled to make informed decisions about their retirement funds.

Even those with a conscience surely have little idea of the positive impact they could make by investing in something more sustainable. How many people look to see how their pension is invested? 

We fully appreciate that there is a big educational job to do here, and the need to make them aware of the positive effect they could have by switching. That said, climate change, the threat to our planet, and the need for action, if we are to achieve the target of net-zero carbon emissions, have never been higher on the agenda. We all have a part to play, changes we need to make, and that will unquestionably make our task that much easier.

There are so many things that people can do to live a more sustainable life. Our aim is to ensure that people become aware of the need to take action. It used to be that talk of climate change and sustainability weren’t that high on the agenda and now it is ubiquitous. The reality is that two in three people don’t know their pension is invested in the stock market. We need to normalise pension talk. 

 We want to give them the chance, and confidence, to align their personal values with the assets in which their pension savings are invested. It’s important that we make as much positive impact as we can in as many areas of life as possible.

To what extent is your offering one that should be relevant to wealth managers and their clients, such as high net worth individuals?
We think that every wealth manager should be having these conversations with their clients.

Potentially, in terms of assets under management, how large could the assets on the platform be?
The opportunity is enormous. There’s £2.6 trillion invested in UK pensions. The UK public are engaged when it comes to climate change and sustainability, and this is one way in which they can make a significant difference. We believe that most assets will one day be invested in sustainable funds.

You are a UK business. Have you learned any ideas and lessons from overseas?
These are early days for TSPC, but we would expect to see similar initiatives emerging in other countries.

ESG is incredibly popular as a topic but, as we know, there are also controversies and issues – skyrocketing energy, worries about sourcing rare earth metals for batteries, greenwashing, etc. What is your ‘ESG philosophy’ and approach? Do there have to be trade-offs?
We start from the view that our portfolios should make a positive impact on the world. The fund managers we work with themselves start with a clean sheet and create a fund universe based on their own principles, shaped by the United Nations’ Sustainable Development Goals.

We place no restriction on the geography of assets, allowing fund managers maximum freedom to choose companies that meet their criteria, wherever they may be based.

Some of the funds held in the portfolios are more traditional ESG funds and may have decided to remain invested in companies in transition to becoming more climate friendly. Should their engagement with those companies be unsuccessful, or it became clear that those companies were not making the desired changes, divestment is certainly an option.

There are some who say that you must give up some performance to invest in a sustainable manner. How convinced are you that ESG investments will outperform?
There was a time when the evidence supported that notion, but funds investing with ESG at their core have been proven to consistently outperform conventional funds, for some time.

How much performance are you trading off with your focus on sustainability?
Our portfolios are likely to experience more volatility, when compared with a more traditional portfolio of the same risk rating. With less diversification and a higher concentration of growth stocks, there could be some performance trade off in the short term – but we are firmly of the belief that ESG funds will outperform over the medium to long term.

When looking back at the last five years, ethical and ESG investing performed relatively well. As the TSPC portfolios include a weighting towards positive impact there may be a performance premium, as it were – and we would expect the portfolios to perform as well as, if not better than, the traditional investment approach.

It's why we engage with a discretionary investment manager boasting excellent relationships with reputable fund managers – a discretionary manager which truly understands those managers’ investment selection process, and which has a proven track record of investing into ‘good’ companies.

Where would you hope the business to be in five years’ time?
It’s very early days, and the market for pension switching is highly competitive. We hope to have helped thousands of people move their pension savings into more sustainable funds, and in doing so, to have made a significant positive difference to the UK’s carbon footprint.

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