How green is your pension?

25 May 2019

This article was featured in the June 2019 issue of the magazine.

Henry Tapper, director at First Actuarial, reveals hope for fundamental change 

Until recently, interest in environmental, social and governance (ESG) issues in society were ridiculed as ‘tree-hugging’. There are still many people who consider climate-change a myth, but they are now in the minority. Most of us know about the Paris Accord which aims to limit and reverse the impact of global warming – and are taking actions to behave more responsibly.

Pensions invest for the long-term; the duration of a typical saver’s pension journey is 68 years, those who start saving at 22 can expect to live to 90. So, for my son, who will be automatically enrolled in November, there is every chance he will be on the planet in 2087. Quite rightly, he is concerned about the quality of his life when I am gone; and his children have every prospect of living in the 22nd century.

While the consequences for baby-boomers like me are less far-reaching, they are very real. We can see that the world is changing in front of our eyes.

So, it’s not surprising that ‘investing responsibly’ is at the top of most pension agenda. Pensions have the capacity to take the long view and getting ESG positions right is seen as increasing return, reducing risk and of course satisfying investors’ wish for a bluer and greener planet.

The Pensions Regulator and the Financial Conduct Authority are now stipulating that those who govern our workplace pensions make sure that members’ funds are managed with proper regard to ESG and that pension savers are given better information on what is being done on their behalf in this area.

Providers, perhaps belatedly, are waking up to the fact that by demonstrating best practice in their pension management, they may win back trust from their consumers. All research I have come across suggests that consumers not only want responsible investment but expect it.


... more expensive than one that pays less attention to these sustainability factors...


One senior civil servant from the Department for Work and Pensions I spoke to recently told me he did not see why he should have to choose responsible investment any more than he should choose a car with brakes. ESG, like car brakes, were not optional extras but should be a part of what the car does.

But workplace pensions, the ones that we use for auto-enrolment, do not promote their ESG credentials as standard; indeed, if you want to invest in a green version of a fund, you have to self-select and take a conscious investment decision. The default funds, which are used by up to 99% of plan participants, do not come with ESG as standard.

One of the reasons for this is that fund managers charge the workplace pension providers extra for ESG management and ESG reporting. This makes an ESG or ‘green’ fund more expensive than one that pays less attention to these sustainability factors. Switching to a sustainable alternative requires a bigger spend and either impacts provider margins or requires a tricky conversation with employers and members about price increases.

Unfortunately, sustainability does not (currently) come for free. This is likely to change. The cost of setting up specialist research programmes within fund managers will dilute over time and the need for in-house researchers will also reduce as more stocks are externally rated by agencies such as MSCI and Morningstar.

Already there are passive funds that are bringing down the cost of ESG management. Although these funds are still more expensive than the non-green alternatives, they are showing that you can provide an ESG management service within the cap. The HSBC Bank staff pension scheme pioneered the use of a passive ESG fund as its default investment strategy three years ago, and RSPB and other smaller schemes have followed.

But these decisions have been taken by employers with in-house pension expertise and/or retained pension consultants. Most small- to medium-size enterprises have neither of these things.

So, it’s particularly good to see that certain master trusts are taking steps to ‘green-up’. The National Employment Savings Trust is most advanced and has announced a number of initiatives that will mean its default fund going forward will run on ESG principles. People’s Pension has appointed Nico Aspinall, a champion of ESG management.

Hopefully, this will mean that as the cost of ESG management reduces, it becomes ‘standard’ within the default of workplace pensions we use. This process will be accelerated by employers putting pressure on their workplace pension providers to state their plans for conversion to ESG principles.

So, if you are reading this as someone who has a say in your employer’s pension decisions, you may want to speak directly to your pension provider on your employer’s behalf. If you don’t have a direct say, seek out the person who does. And of course, you can lobby your provider either directly or through its independent governance committee or trustee board. 

Hopefully we will not have to wait until it’s too late to get green pensions!