More than two-thirds (69 percent) of employers in the UK now offer a responsibly invested company pension, research from Scottish Widows has revealed.
However, the pension provider found that less than half of employers have this option as their default (44 percent).
The provider said that this puts the onus on employees to take action if they want to move to a more responsible pension fund.
However, this is not an ideal solution because the research shows that 61 percent of employees do not know how to switch their fund.
The findings, published in Scottish Widows’ Responsibly Invested Pensions Report, highlight that there is a growing need for employers and advisers to educate workers on how to switch their pension investment.
Further research from the provider revealed that employees are becoming more interested in how environmental, social and governance (ESG) ‘friendly’ their company pension scheme is. Six in ten employers reported seeing an increase in employees that want to understand how sustainability is embedded in their pensions in the past year.
Researchers said that when employees were asked about their pension investment priorities, the two most important objectives were ensuring long-term value growth (63 percent) and financial risk management (41 percent).
Almost one in five (17 percent) now also view the environmental or social impact of their pension as a top priority. This focus rises to 25 percent among workers aged 18-34.
Scottish Widows said that this suggests employees now want their pension investments to generate positive environmental or social outcomes in addition to a decent financial return.
Employees were asked which responsible investment tools they believed were most effective for delivering long-term, sustainable returns. Forty-five percent said they would invest in companies directly contributing to positive environmental or social outcomes that align with the UN Sustainable Development Goals (SDGs). Close to two-fifths (38 percent) said they would reduce exposure to companies or industries that harm the environment or society.
In light of the trend for employees to favour more responsible pensions, employers are taking action to embed ESG investment into their pensions. More than half (53 percent) are allocating pensions to specific sustainable funds. Close to half (46 percent) of employers said their workplace pension was invested in impact strategies and 45 percent are focused on investing in companies that are cutting carbon emissions.
The research shows that employers prefer active engagement with investee companies and voting (36 percent), over exclusion policies (20 percent). Scottish Widows said that these are both important levers that pension providers can use to manage ESG related risks and opportunities.
Eva Cairns, head of responsible investment at Scottish Widows, said: “Providing workers with the opportunity to save for their retirement in a way that delivers financial and societal value in the long-term can only be viewed as positive and we have an important role to play in educating savers about responsibly invested pensions.
“Employers and advisers are now tasked with navigating a critical balancing act: delivering pensions that grow while also reflecting employees’ values. This requires not just guidance but clear approaches, priorities and innovation – for example through private markets, active ownership and investments that support transition leaders and the achievement of the UN SDG. These are some of the levers available to achieve long-term financial returns with positive sustainability outcomes.”
However, while employees are prioritising responsible pensions, many still feel uncertain about their options. The research highlighted key concerns about the lack of clarity around costs and benefits (25 percent), scepticism about comparable returns (23 percent), and general uncertainty around funds labelled as ‘responsible’ (20 percent).
The vast majority (91 percent) of employers report that they offer employees guidance on responsible pensions. Four-fifths (81 percent) say they feel confident that they do this effectively.
Researchers said that financial advisers are also improving their support in this area of financial education. This is despite 38 percent of advisers reporting that their clients have doubts about whether responsible pensions can really make an impact.
Eighty percent of advisers feel well-prepared to provide advice around them, and 70 percent are already doing so.
However, only 11 percent of advisers report client enquiries about responsible pensions.
Cairns said: “Transparency is key; workers want assurance that their pensions are future-proof, both for their retirement and the future world they will retire into. Meanwhile, employers must demonstrate how they have considered responsible investment in their workplace offering, especially their default that the majority of employees will be in. These should be key considerations for employers and advisers as they engage and meet employees’ and savers’ expectations.”
