VIEW THE FULL ROUND TABLE PDF SUPPLMENT HERE
Switching pension providers is no small task for an employer. So if the general trend shows pension providers are decarbonising and becoming more ESG-friendly overall, why should they switch?
The broad trend shows that pension providers are decarbonising their investment portfolios at a rapid rate. Providers have adopted the goal of reaching net zero emissions by 2050, with most providers aiming for a 50 percent reduction in portfolio emissions by 2030.
It’s not just CO2 emissions that are the focus of pension provider action. ESG screening has increased for pension funds as well.
The most widely excluded investment assets are controversial weapons manufacturers, thermal tar and violators of the UN compact. Although, like the providers’ carbon footprints, ESG screen exclusions vary. But progress is unmistakable. And given the improvements, you might wonder why busy employers would want to move to another scheme if everyone is improving?
This topic, and exclusive research ranking the ESG performance of 20 major pension providers, were discussed at a recent Benefits Expert round table in London.
In attendance were:
- Tara Thomas, pensions and benefits manager, Associated British Ports
- Rosie Lacey, head of pensions and benefits, Costain Group
- Mohsin Harhara, head of pensions, Skanska
- Tony Burdon, CEO, Make My Money Matter
The obvious answer to why employers might consider changing provider on ESG grounds is the growing concern about the impacts of climate change. In June 2024, 80 percent of people globally said they want stronger climate action by governments, according to the worldwide UN Development Programme survey.
Tony Burdon, CEO at Make My Money Matter, says: “Eighty percent of the population of the world are worried about climate change and want their governments to sort it out. They’re not sure they can do much, but they just want responsible people to sort it out. That’s the demand.
“For employers, businesses, pension funds, the job is to try and work out how to do it. That demand is there. With pensions, it’s such an opaque, impossible thing for normal people to get a grip on,” he says.
VIEW THE FULL ROUND TABLE PDF SUPPLMENT HERE
Changing provider
However, changing pension providers is complicated and ESG is not necessarily a top priority when it comes to making that decision.
“For me, the trigger to switch wouldn’t be the ESG, the trigger will be that the funds aren’t performing, or the provider has become really bad at administration, and people at retirement are not getting the retirement pot they should be, or there’s something fundamentally going wrong,” says Rosie Lacey, head of pensions and benefits at Costain Group. “At that point, I would say, right, we are going to switch, and that will then form part of the review going forward.”
Lacey says that rather than switching to a more ESG friendly pension, as long as there is nothing wrong with the provider, staying with them means employers have the opportunity to encourage that provider to become more ESG focused.
Mohsin Harhara, head of pensions at Skanska, agrees, adding that employers with a large fund, who are important clients of the provider, have got more influence than the smaller funds. “In terms of numbers as well, if enough of these larger clients are saying the same things to make or to force changes, [it could make a difference].”
For Harhara, a potential prompt for switching pension provider “would probably be a lot of bad press”. He says: “Climate change is going to come more to the forefront as these [emission reductions] deadlines arrive. Then if there’s a pension provider that’s not doing what they ‘say on the tin’, or not upping their game, then they’re probably going to get some exposure in the media, and a firm might not want to be associated with that.”
Tara Thomas, pensions and benefits manager at Associated British Ports, questioned how much impact switching to a more ESG-friendly pension provider would have if you were moving to one with only a slightly better score, suggesting that the difference would need to be substantial to influence decision making.
For Burdon “the shock is at the bottom [of the rankings], no one should be with them”, he says. But he acknowledges that for employers, the priorities are to look at the usability of the scheme for your employees and returns, and then look at ESG or sustainability. Costain’s Lacey adds that she is disappointed by the performance of some of the funds in the table (view the pdf supplement for the full table of results), particularly the ones that are auto enrolment vehicles. She says she might have expected these funds to have performed better in the rankings.
Power in numbers
Skanska’s Harhara, reiterates that employers have a part to play in putting ESG on the agenda of pension committee meetings. “We have a role in looking at the performance and holding providers to account where they perform badly, [to ensure] that they’re trying to get some metrics around sustainability as well. But I think it’s power in numbers, if we all do our bit, we can make a change.”
He remembers a past example, where a provider introduced new sustainable self select funds, and made some changes to the default fund. “Shortly after launch, one of the sustainable funds wasn’t performing very well. So we asked why.” At the time, the information wasn’t available. So their provider investigated further, he explains. “It turned out that the stock responsible for the underperformance was one that they had high conviction for for the future. So in the short term, they were trying to turn around the company and they thought there was potential there, but it was affecting performance. But by doing that, asking the question, we were putting soft pressure on the provider by showing them we care about this.”
Employees asking for more sustainable pensions could act as another lever to drive change. However, Thomas says: “One of our company values is to do with sustainability. But I’ve not actually been approached [by employees] in terms of how the pension covers that.” Harhara says he doesn’t think that the rise of more sustainable pensions will necessarily increase pension take up. But highlighting the shift towards greater sustainability could help to retain and attract talent, he adds, as people become more interested in ESG.
To really move the needle, Costain’s Lacey flags a potentially controversial option. “If you’re being forced to auto enroll employees, can’t the government say, ‘the vehicle that you’re enrolling people in has to be compliant?’”