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Investment – a step change in the adoption of ESG

Chapter three of the FTSE 350 DC Pension Survey 2021

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By Andrew Hope | July 9, 2021

There is an even stronger emphasis on environmental, social and governance (ESG) factors, with many plan sponsors intending to integrate these into the main default investment strategy in the immediate term. When we asked what the objective here was, the main response given was to ensure consistency with the corporate’s ESG policy.

Investment designs across all scheme types continue to be refined based on how defined contribution (DC) members are expected to access their savings beyond retirement. Investment design increasingly focuses on environmental, social and governance (ESG) factors, with ESG integration into default designs likely to become the norm over the coming years.

Default design

It’s seven years since Pension Freedoms revolutionised the retirement landscape, introducing new flexibilities around how benefits are accessed. How DC members will access their savings after retirement continues to be a key consideration in investment design for all scheme types.

ESG continues to gain significant focus across all scheme types, with 65% already integrating ESG into their investment range.”

Andrew Hope
Director, Retirement

Our survey found that 78% of default investments are now either targeting income drawdown or a more balanced withdrawal approach (up from 44% in 2017).

The proportion of contract-based (56%) and master trust arrangements (36%) targeting a balanced approach was much higher than those within trust-based arrangements (21%). This perhaps reflects the fact that trust-based arrangements are better able to design bespoke investment solutions to meet the specific needs of their membership. Trustees now have several years of retirement decisions to help inform these bespoke designs.

In comparison, employers using contract-based or master trust arrangements are more likely to rely on the provider’s packaged investment solutions. These designs need to cater for a much wider population and therefore tend to be broader in terms of the options they target at retirement.

Environmental, social and governance (ESG) integration

ESG continues to gain significant focus across all scheme types, with 65% already integrating ESG into their investment range. Within two years it is expected that almost half of schemes will have blended ESG into the default option, demonstrating the commitment of plan sponsors to making it easier for members to take these important investment factors into consideration.

This is being driven by:

  • Reputation - our survey showed that nearly three-quarters of respondents cited consistency with corporate policies as a key factor for ESG integration.
  • Regulation – there has been increased regulatory pressure on schemes to consider ESG, with the largest schemes soon being required to report on climate risks and opportunities. Within our survey, 57% of schemes were focusing on ESG due to regulatory pressure.
  • Risk and return – 37% of schemes were influenced by the potential for increased investment return. Our survey also identified ESG integration as one of the key ways of improving value for members.

Engaging with ESG

Schemes are increasingly aware that ESG can form an important aspect of engaging with members with 41% of schemes identifying engagement as one of the factors driving the focus on ESG. Campaigns such as Make My Money Matter are raising awareness of the importance of responsible investment within the pensions industry.

Chart showing that the focus on ESG in investment options continues to grow.
ESG focus in investment options continues to grow

Note: “Future” assumes schemes “planning” to add ESG focus, will do so. Percentages may not add up to 100% due to rounding. “Don’t know” was excluded.
Source: FTSE 350 DC Pension Scheme Survey, 2021

Graph showing what the influencing factors in the move to focus on ESG are. ESG is top at over 70%.
To what extent are the these influencing factors in the move to focus on ESG?

Note: Percentages are “4/5 To a great extent”. “Don’t know” was excluded.
Sample: Companies that are at least considering ESG focus as default or self-select option.
Source: FTSE 350 DC Pension Scheme Survey, 2021

We also found that schemes of all types plan on surveying their membership to understand their views on ESG, with trust-based schemes showing greatest interest (more than two-thirds, 68%, have already undertaken a survey or are at least considering it). Where schemes have undertaken member surveys these have often provided significant opportunity for engagement. For example, results from other surveys have shown that members are often willing to contribute more into their pension when they know their savings are being invested responsibly.

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FTSE 350 DC Pension Survey 2021 PDF 4.9 MB
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Andrew Hope
Director, Retirement

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