Adding value to pensions

01 April 2020

Ian Neale, director, Aries Insight, explains a role for payroll advisers.

For many employees their pension will be their biggest asset and protection against poverty in old age. At the same time, reliance on a money purchase pension is growing as access to a defined benefit scheme has all but disappeared in the private sector.

One advantage for the individual member is that the value of their accrued pension rights is much clearer. It’s a pot of money, invested for a greater return than cash. Many individuals are paying anxious attention to this, and so are government and regulators. It’s no longer purely about maximising fund growth over the coming months or year. Environmental, social and governance (ESG) considerations are financially material and as such have to be factored in.

It’s a truism that pension saving is a long-term proposition, but the implications for investment strategy have not always been recognised in the way they are now. We hear much more about ‘responsible investment’, ‘sustainable investment’, and simply ‘ESG’.

There are dangers, however, in the way pension scheme trustees and other parties might respond to this. In a compliance culture, there’s a risk the obligation to consider ESG is treated as a ‘tick-box exercise’ or delegated to asset managers. Simply choosing a fund labelled ‘ESG’ or ‘green’ risks becoming a victim of ‘greenwashing’: the application of ESG considerations to asset management might only be superficial.

Inured as we are to compliance, there is also a danger that it’s seen as enough to simply amend the scheme’s statement of investment principles, to include policies relating to all financially material considerations, including climate change, as required by new regulations in force from 1 October 2019. That’s probably one reason why the government proposes to legislate via the Pension Schemes Bill currently before Parliament, to require trustees and managers of occupational pension schemes to take proper account of the effects of climate change on scheme assets and governance, and to publish what they’re doing about it.

Even that carries the risk that interpretation of ESG will be reduced to climate change, and worse still, simply avoiding fossil fuel investments. We must not lose sight of the effect of social issues like employee rights, use of agency workers and zero-hours contracts, diversity, supply chain monitoring, etc on a company’s reputation and prospects. Likewise, governance: asset managers and large pension schemes are big shareholders and should exercise their voting rights where poor governance damages profitability.

It really is all about investing in a sustainable future, which demands our engagement: not only by trustees, but by every one of us because we want a habitable planet in future. Which leads us to question how we’re going to achieve this, especially those of us who are not professional trustees or investment managers. To start, more information and guidance is coming our way, partly in response to the kind of regulatory innovations mentioned earlier. How intelligible it proves to be is another matter: reams of information permeated by jargon will often be ignored.
To most people, everything about pensions is unclear, and what they have heard has not encouraged them to find out more. This is where benefit consultants, human resources managers, payroll advisers and others who interact with employees can add value. We don’t need to be fund managers to make a difference to people’s retirement.

On the other hand, few are pensions specialists; and even those who are will readily acknowledge they don’t know all there is to know. Increasingly we rely not only upon others to supplement our own knowledge, but also on tools for self-reliance.

No-one charged with maintenance of a building would rely on a single screwdriver. Efficient use of staff time will require provision of an electric screwdriver as well as all the bits. That’s just common sense. There’s no point in employing someone without making sure they have all the tools to do their job properly.

And yet how far is this principle being carried through for what we used to call ‘white-collar’ workers? How much – a percentage of salary – is being spent on equipping staff to deliver the best possible service? Anecdotal evidence suggests remarkably little.

It’s just not good enough to train someone in a particular process or set of processes without at least enabling them to understand why certain steps are required, and more especially, to be able to explain this to others affected by their work.

In the language of today, we’re all customers and increasingly ‘consumers’, even of information; but few of us are experts and certainly not confident about predicting the future. Financial advice has been hard to come by – the so-called ‘advice gap’ is a subject for another article – but expecting people to make sense of published guidance alone is not going to work.

That’s where you, dear reader, can add value to pensions: given the tools you need.

This article was featured in the April issue of Professional in Payroll, Pensions and Reward magazine and was correct at the time of publication.