Using the same approach as the rest of our finance guides, we have marked companies down for shareholdings in problem companies.
All of the companies on our table offer an ethical pension fund option, and most also provide workplace pension schemes (indicated with a [W] on the table). New to the table are Fidelity, LV= and Royal London, which now offer at least one pension fund described as ‘ethical’ or ‘sustainable’, while other brands have disappeared: Friends Life is now part of Aviva, Scottish Life is now Royal London.
The big takeaway is that only one company, Royal London, managed an Ethiscore in double digits and only Zurich achieved a best rating for its environmental reporting.
There was a clean sweep of worst ratings in the Anti-Social Finance category, indicating that directors’ pay was excessive or the company was considered to be medium- or high-risk for likely use of tax-avoidance strategies, or both.
Only two companies (LV= and Royal London) received positive Company Ethos marks for having a mutual structure. (Old Mutual, despite the name, is not a mutual organisation.)
In 2016, we published a report on carbon divestment and how to find carbon-divested pensions. This guide is designed to complement that report with a broader reflection on what is available across the pension sector.
Personal ethical pensions
Whether you want a stand-alone fund or to top-up an occupational scheme, our score table ranks some of the main companies you are likely to come across. The way ethical pensions usually work is that they are ‘linked’ to an existing ethical investment fund which we have covered in more detail in our guide.
So, to get an ethical pension you will need:
a) one of the pension companies on our score table,
b) an ethical fund for it to put your money in.
Many of the companies on the score table above will offer lots of different linked options. For example, you can invest in the Aviva Kames Ethical Equity pension fund or in the L&G Jupiter Ecology pension fund, and so on. But not all of the funds in our guide to ethical investment funds can be pension-linked.
Choosing the right pension can be so complicated that seeking independent financial advice is usually recommended. Our guide to the best ethical Independent Financial Advisors appears in our special report. It should also be noted that not all commentators agree as to whether this type of pension arrangement is still a good option (see ‘Bespoke saving’ below).
Workplace pension schemes
Until April 2017, it was common, but not compulsory, for employers to have an occupational pension scheme. That changed with the introduction in the UK of ‘auto-enrolment’ workplace pension schemes, which required all eligible employees to be automatically enrolled and for phased-in combined contributions from employers and staff to reach at least 8% of monthly salaries by April 2019. You can opt out of your workplace pension but then you’ll miss out on contributions from your employer and you’ll also need to keep opting out every three years otherwise you’ll be automatically enrolled.
All the companies offer workplace pensions except for Royal London, LV=, Virgin Money and HSBC.
See our feature on how to make auto-enrolled pension schemes ethical.
Using your voice
Regardless of the type of scheme you’re in, contributing to, or receiving payments from, a pension fund makes you a stakeholder in the companies in which that pension fund invests. A number of organisations are urging pension fund members to use their voices to call for investment decision-making to consider environmental, social and governance (ESG) factors, such as human rights, poverty, and climate change, not just monetary return.
The EIRIS website lists the top 100 UK schemes and whether they incorporate ESG issues into their investment processes. It also provides a step-by-step guide to investigating your occupational pension scheme’s investment policy and encouraging it to take ESG issues into account.
ShareAction is another established voice in this debate. It has a wide range of materials on its website to help people speak out and a Green Light campaign setting out five key demands (see below) and related specific ‘asks’ for pension fund managers on fossil fuels. You can read more about this campaign in an article on pensions and climate change written by ShareAction.
Green Light campaign demands:
- Disclose how much of our money is invested in fossil fuels and carbon-intensive industries.
- Disrupt fossil fuel companies’ plans to explore and develop new sources of carbon.
- Divest from companies that only produce coal.
- Divert investment into green investments.
- Demand political action against climate change.
Fossil Free UK, the British branch of the international carbon divestment movement, is a collaboration between 350.org, Community Reinvest, Platform, Friends of the Earth and Friends of the Earth Scotland.
In November 2017, it launched a campaign, ‘Fuelling the Fire’, focusing on the fossil fuel investments of public sector pensions by local governments. At Ethical Consumer, we were disappointed to see the Greater Manchester Pension Fund topping the table with £1.7 billion directly or indirectly invested in fossil fuels (over 10% of its total value). If you’re part of one of the regional pension funds in the Local Government Pension Scheme (LGPS) then you might want to take a look.
The good news for workplace schemes more generally is that it is about to become easier for them to divest from fossil fuels. Previously, some pension scheme trustees argued that they were bound by ‘fiduciary duties’ to seek the best returns regardless of any other considerations, e.g. climate change, and citing these legal obligations as a rationale for rejecting members’ calls for divestment. Now, the government is introducing new investment regulations, enabling pension schemes to “mirror members’ ethical concerns” and “address environmental problems”.
According to a recent study by the Financial Conduct Authority, two-thirds of all UK adults have a private pension provision, either through their employer or through personal contributions. Among the over-45 working population, that proportion reaches 75-80% but, among 18-44-year-olds, it drops to 58%. Although this sounds relatively promising, that still leaves around a third of all UK adults (around 15 million people) with no pension provision other than the state pension, which currently stands at £159.55 per week.
But rising rates of self-employment over the last twenty years raise concerns that many, especially those on low incomes, will not have the complete record of national insurance contributions required to qualify for the full state pension. Equally, those working on zero-hours contracts and poverty wages often have nothing to put aside for the future, either in national insurance contributions or a private pension scheme.
Pension saving can also be restrictive: funds are locked away until you reach a certain age and your investments are at as much risk from the vagaries of the stock market as regular investments. You can buy an annuity to give you a guaranteed income but if you die earlier than expected then all your savings go to the annuity-provider.
Sure, the tax relief on pension contributions is advantageous but some argue that investing in property or using the recently-increased ISA allowance could be just as good and offer more flexibility.
Tailored to you
From an ethical perspective, bespoke saving can be an attractive option for those wishing to tailor their investments to their ethical worldview. For all their ‘ethical’ screens and engagement and transparency, almost all of the formal pensions options are based on funds which invest at least some money in mainstream stocks in global companies, many of which are involved in the kind of issues – tax avoidance, animal abuse, short-termism, fossil fuels – that Ethical Consumer chooses to draw attention to.
It should be acknowledged that property investment is not free of ethical pitfalls. For some, it just means downsizing the family home when the time comes but, for others, it can mean amassing buy-to-let properties in a way that has been accused of forcing first-time buyers out of the market. Of course, there’s a big difference between owning streets of run-down housing and letting out a flat at reasonable rent and with great service and repairs.
Nevertheless, the idea of a ‘pension pot’ made up of cash ISAs, bits of responsibly-managed property and even a few direct investments in renewables, gives a glimpse of what might be possible without the compromises of using ethical investment funds with their mainstream shareholdings.
This hypothetical bespoke pension pot might be risky but it could back community energy projects, healthy food production, affordable housing, mutual financial institutions and resource efficiency.