With many employees expecting a responsibly invested pension, but nearly half unsure if they have one, HR has a crucial role to play in bridging the knowledge gap. Benefits Expert speaks to Eva Cairns at Scottish Widows about the best ways to achieve this.
Employee demand for responsible pensions is high. In fact, research from Scottish Widows found that 72 percent of workers expect their employer to provide a responsibly invested pension. However, 47 percent of employees don’t know whether their pension is responsible or not.
When pension engagement is so crucial, given the looming retirement undersaving crisis, what can employers do to close this information gap?
It seems obvious, but firstly, employees need to know whether their pension is invested responsibly, says Eva Cairns, head of responsible investment at Scottish Widows.
Employees expect their workplace pension to deliver a return and to do so responsibly because that’s the right thing to do, she says.
However, a large proportion of workers are not sure if their pension is actually doing that.
On top of this, if their savings are not as responsibly invested as they’d like, employees have little idea of how to change their pension investment options, for example by moving their savings out of the default fund.
“The majority of employees are in a default pension and make no choice,” Cairns says.
She asks: “How many employers actually make sure that they’ve got responsibly invested principles in their default fund versus the employee having to actively choose a specific fund to meet responsible objectives?”
If employers can’t answer this, what hope have employees got of finding out?
More investment transparency
Low or no employee understanding of what a responsible pension looks like and what it means is a major barrier to engagement.
Cairns says that to address this, employers need to be transparent about what the default pension is invested in and clear that savers have other investment options that could help them achieve their pension goals.
“A lot of questions around people’s pension objectives are around risk and time to retirement. [It’s important] to actively address the topic of what matters when it comes to a positive impact on society, on the environment, in addition to financial return.”
Informed choice
It can be difficult to quantify pension returns for any investment.
When it comes to responsible funds there are many ways of incorporating sustainability criteria. It can look like exclusions for fossil fuel companies, tobacco producers or companies known to treat workers poorly, not to mention companies that support deforestation.
“Responsible investing might mean different things to different people. For us, it’s a combination of levers that you can pull to manage the risks and make the most of the opportunities,” Cairns says.
But she adds that there are a lot of perceptions about responsible pensions without full understanding.
The answer is to provide simple education around what a responsibly invested pension means and then to highlight the other options that can deliver that without compromising return.
“Not everybody needs to be an investment professional to know this,” she says.
Scottish Widows works with a lot of employers to help provide a picture of what is in the pension default fund and what is available in addition to the default as a self select choice.
“That choice needs to be there because the default fund almost needs to embed those criteria in a way that doesn’t necessarily create a very concentrated, expensive, actively managed impact fund.”
For employees that have more specific requirements there are additional funds they can move into from the default pension.
Cairns adds: “In my view, you need to have a sensible approach to incorporating responsible investing into your default and then additional options for those that want more or different things, or certain exclusions applied. That’s what employers need to be quite transparent on.”
Transparency versus advice
When it comes to offering education and information about responsible pensions, it’s important to know how far HR can go.
“There’s kind of transparency versus advice, right?,” says Cairns.
“With transparency you are not saying you should do this, or you should do that, but you are saying, this is what you’re getting in your default pension, and here is how things are,” she explains.
“There shouldn’t be any concern around being transparent and vocal, and having that information available.”
Information access
The real issue is a lack of accessible information.
Currently, when employees look at their pension statement, they see a lot of financial metrics and information about what you will get when you are a certain age.
Cairns says there is not enough information on how ESG criteria is incorporated or what proportion of the fund is invested in companies that are aligned with the goals of the Paris Agreement, for example.
“Things like that that actually make people think,” she says.
“There needs to be a sensible approach. We need to understand that a lot of default pensions track a market index, and there’s a wide universe in there. So you want to make sure that you are applying certain principles through exclusions, tilts and so on, that manage or reduce the risk.”
She adds that information about how responsible your pension is should be made available on pensions dashboards when they are rolled out.
Should government legislate to encourage responsible pensions?
When it comes to further interventions, Cairns says government has an important role in setting the right foundations.
However, she adds: “There should be principles of how our pensions are invested responsibly, but it’s quite difficult to legislate on that and mandate ‘here is what you need to do’.
“Different financial institutions in the industry have different exclusions policies, different approaches to what they include in an index, versus how much weight they put on active ownership and engagement.
“You could set out the principles that pensions should absolutely manage the risks and opportunities related to factors that impact long term growth, and for us, that includes ESG.”
Based on these principles, pension providers and employers could show employees how that is applied in pension investments, says Cairns.
She agrees it would also be helpful to have a clear steer from policy makers on the importance of providing key information to employers and savers.
But she emphasises: “Pensions providers need to make it clear that engaging people with responsible pensions is in the financial best interest of building more resilient investment portfolios, more resilient pensions, and will help shape the world that savers will retire into.”
Easy access
Cairns urged employers and HR to “really challenge themselves” about how easy it is to find information about responsible pensions via their existing channels.
As well as assessing this route, she says there are lots of useful resources that providers offer that they can link to and reuse.
But she adds: “It needs someone to take that ownership and initiative, to have a role thinking about how they communicate that pension offering to employees, including that responsible investing aspect.”
Inviting providers into the workplace to talk to people about responsible pensions is another way to boost knowledge and it is something Scottish Widows has done with employers.
In January, the provider announced a new strategic partnership with asset manager Robeco. It said the partnership will help it to shape its investment offering for UK pension savers and include responsible investing as standard.
Cairns is keen to share stories about responsible pension investing with employers and workforces to help bring examples to life.
“Companies that do well financially can also do good in terms of sustainability, people do not need to be scared of responsibly invested pensions and losing out on return.”
