08 Sep 2023

Top tips to align your corporate values with your pensions strategy

Organisations are steadily improving their ESG credentials, but are employees’ pensions – and how they are invested – at odds with this shift?

“To the Chief Executive; we like what your company is doing on environmental improvements, and we’re pleased that you’re working effectively towards your net zero pledge. It’s also encouraging to see your positive policies on diversity across all aspects of your business. But what are you doing to make your pension fund more sustainable?”

We’ve perhaps not yet seen this type of conversation in boardrooms, but it’s coming. Many companies are working to become more responsible and sustainable. This is not just because they feel they have to, but because they genuinely believe it’s the right thing to do from a financial perspective. At the same time, the investments of the defined contribution (DC) pension schemes of these companies are often not aligning with these sustainability and climate goals. This will need to change over the coming years.

Why now?

There’s been an increased interest from government and regulators in where pension scheme money is invested, meaning greater disclosure. The requirements in relation to TCFD (the Taskforce on Climate Related Financial Disclosures) are bringing this more sharply into focus. Trustees now have to set out in their Statement of Investment Principles how they deal with environmental, social and governance (ESG) issues (and climate change specifically).

Implementation Statements must give information on how the Trustees and their asset managers are putting their policies into practice. Independent Governance Committees (IGC) of contract-based arrangements have a raft of responsibilities to consider the providers’ policies in relation to ESG.

We’ve already carried out detailed reviews for both IGCs and master trust trustees to benchmark the responsible investment credentials of their providers.

Many chief executives, finance directors and HR directors have little or no idea where their company pension scheme’s default strategy is invested. Some may have previously opted out of the scheme due to annual or lifetime allowance issues – although the changes in this year’s Budget will hopefully have helped that situation at least to some extent. But with all aspects of a company’s business coming under increasing scrutiny (and in some cases contracts being won or lost partly on a company’s ESG practices), the time is now right for them to take a greater interest.

The practicalities of introducing a more ESG-focussed pension scheme

We’ve found that many of our clients have already started to consider the way the pension scheme is invested and how this dovetails with the company’s wider policies on sustainability and climate change.

Increasingly, clients have started to invite their company’s sustainability teams to present regularly to the trustees or governance committees to outline their current policies and future plans. This has led to informed and inclusive discussions about how the investments of the pension scheme shape up against the company’s policies and goals.

For some clients, we’ve seen a genuine desire to better reflect the values and goals of the company within the pension scheme. We’ve been able to explore the funds and strategies that are currently available to DC pension schemes which might bring our clients and their organisations’ policies closer together. Some have directly changed the investment strategies of their default arrangements off the back of this. Some have wanted to go even further and to work with their fund managers to explore whether more bespoke strategies could be built to enable that better alignment to take place.

For those within single trust schemes, this tailoring of default strategy can be achieved relatively easily. It’s harder to achieve this through the “off the shelf” default strategies of master trusts or contract-based arrangements but for those companies with the appetite to do this, tailored strategies can be built with many of the leading master trusts and GPP providers. And we’re seeing genuine progress in many of the leading providers to make their strategies more sustainable, with most having clear net zero targets.

Be bold, make changes

We’re still in the relatively early stages of developments here, but we fully expect this to become a greater area of focus going forward. In line with our own clear climate pledge, we’ve already made changes to our own staff pension scheme at Hymans Robertson to help us align more closely with the direction of travel of the firm as a whole. We see this as a journey rather than a final position, where we can develop our strategy over time to reflect both the changing market background and the products that are available. We see other companies increasingly keen to do the same.

If you’re not doing so already, we challenge you to assess how well your own pension scheme aligns with the sustainability and climate goals of your sponsor – and to be bold enough to make changes where you believe this is the right thing to do.