Sustainable Solutions for Auto-Enrolment
The introduction of the government’s flagship auto enrolment policy in the UK has brought over six million new people into a pension scheme, with more than 100,000 businesses setting up a workplace scheme.
It is a policy that has helped reverse a decade-long decline in the nation’s general level of retirement funding.
Simply put, auto enrolment (AE) is a legal requirement for all UK employers to establish a pension scheme for staff members and opt them in on an automatic basis, and is a landmark policy that companies should ensure they make the most of.
For companies with a strong corporate social responsibility reputation, the policy also creates a new question: as a responsible business, are you also ensuring that your pension scheme is a responsible investor?
Sustainable options are available
The bulk of UK pensions are made up of a range of investment funds, which are typically structured as Open-Ended Investment Companies (OEICs). These allow individuals to pool their money with others to hold shares in a wide range of companies.
This is a huge part of the UK’s investment market place and, as a consequence, there are many hundreds of these investment funds. Under auto enrolment rules an employer must select a default fund which meets criteria laid down by the Department for Work and Pensions (DWP), and offer a choice of alternative funds too – though in practice few individuals take an interest in selecting their own funds meaning most UK workers are invested into default pension funds within their AE scheme.
The problem, however, is that the standard default options being offered by many insurance and investment groups are often not sufficiently transparent, and will not typically include a policy on responsible and ethical investing, let alone any recognition of carbon divestment.
This is of course a very serious issue for companies, charities or NGOs with a strong corporate responsibility ethos. It is one of the most common issues that employers have raised with my firm, Castlefield, over the past few years.
Fossil free pensions?
At Castlefield we work a lot with the Alliance Trust Sustainable Futures Funds which offer a range of nine investment strategies that take sustainability trends into account in their investment methodology.
For example, the funds exclude ‘carbon-intensive’ industries and tobacco companies because they do not make a measurable contribution to a sustainable future. These funds, instead, positively invest in businesses seeking to profit from the massive expansion occurring in the renewable energy markets (both solar and wind energy) as well as into other important investment themes such as energy efficiency and clean/low emissions transport.
In fact, Alliance Trust Investments plan to divest entirely from oil and gas extractives by the end of 2026 on the basis that current global CO2 emissions levels place the world at very grave risk of average global temperature increases exceeding 1.5°C.
We have worked with WWF and Greenpeace to set up largely fossil-free AE schemes for their staff, based on the Alliance Trust funds. This can also work for smaller companies. We have recently been setting up something similar with a four-person PR agency.
The Alliance Trust funds also show that sustainability does not mean sacrificing returns. Seven out of eight of their funds are in the first or second quartile of their sectors over one, three and five years.
The world is also changing. Last year’s Paris Agreement for example has put the world on a clear trajectory towards a low-carbon economy. Investors increasingly acknowledge that those companies that manage environmental, social and governance issues in a responsible manner are more likely to succeed over time, and there is an increasingly strong business case for pension schemes to invest in sustainable funds.
[Since this article was written, Alliance Trust Investments was acquired by Lion Trust. For more up to date on this subject see our guide to Fossil Free Funds (most of which can be linked to pensions).]
An issue of trust
For employers, providing at least an option of a responsible or ethical pension is becoming an extension of good CSR practice.
Most employees trust their employers to look out for their best interests and, just as they would expect high standards of support and training in their role, they would also expect that their pension savings are not invested in sectors that might go against the core values of the company.
Employers have a crucial role to play and it’s vital that they choose their schemes carefully.