Ethical pensions: investment policies, switching and performance explained


Updated on 11 February 2019 | 0 Comments

Auto-enrolment means vast numbers of us are building up pension pots, but have no idea what we’re invested in. Here’s how to make your pension ethical.

Our pensions are the biggest savings pot we’ll ever accumulate and the longest-term.

As Lisa Hardman, director of financial advisors Investing Ethically, points out, your pension could be around for 50 years.

But do you know what your money is being used for?

Climate change, gambling addiction and alcoholism can all be partially attributed to FTSE 100 companies that your pension might be funding. It’s possible you could be invested in cluster munitions, biological or even chemical weapons.

That’s despite 70% of UK adults wanting pension providers to avoid companies with unethical practices (according to ShareAction).

Pension auto-enrolment means that we now all have a reason to look at our pension. If you’re concerned by what you find, here’s how you can change funds or even switch providers.

This article is about ethical pensions: click here for our article on ethical investments.

What are you invested in?

Start by finding out your pension provider: if you were auto-enrolled your employer should give you this information.

The good news is that many providers make ethical investment funds available. Royal London is the latest to allow pension members to switch to its sustainable range of funds at no extra cost.

However, it’s unlikely that your default fund – in which you are probably invested –  is particularly ethical.

Although restrictions on fund managers making ethical decisions have been lifted, limits on fund charges for auto-enrolment schemes put many ethical investment options financially out of reach.

A report by charity ShareAction looked at the main providers and scored them on ethical investing.

Government-founded provider NEST scored particularly highly, there was little to differentiate other providers. Default funds made only limited efforts to consider climate change or tax avoidance when investing, for example.

Providers default funds – not their ethical funds – were scored as follows:

Provider

Share Action score*

NEST Pensions

74%

The People’s Pension

58%

Legal & General (contract-based)

57%

Legal & General (master trust)

55%

Aviva

55%

Standard Life (master trust)

55%

Standard Life (contract-based)

55%

Scottish Widows

53%

Royal London

47%

NOW: Pensions

39%

Aegon UK

26%

*Calculated from a ShareAction score out of 352. Smart Pension withdrew from the survey and has no score.

Seeking advice

If you use a financial adviser, they should already be investing according to your wishes.

If you haven’t got an adviser, or are unsure about the current one, above-mentioned firm Investing Ethically offers a pension review service.

The findings can be surprising, explains director Hardman: “don’t realise that their fund is investing in big oil, companies that make weapons, mining.”

In some cases, even people who’d asked their financial advisor to avoid areas found themselves invested in them anyway, Hardman says.

“There’s a lack of communication on the ethical side of things”

What makes a fund ethical

There’s no catch-all definition of what constitutes ‘ethical’ because people’s views are very different.

What’s important is that your fund isn’t investing in areas you oppose. A variety of terms are used to describe funds and Standard Life has provided a useful explanation to them.

Ethical funds generally screen out tobacco, gambling and armaments, while seeking companies that contribute positively to the environment and society.

Ethical pension funds often screen out tobacco (image: Shutterstock)

SRI refers to sustainable and responsible investment: funds which seek to invest in the most sustainable companies, those that manage their environmental, social and community impacts for the greater good of society.

Impact and Green funds deliberately invest in companies that aim to make a positive social and environmental impact, whilst Shariah avoids alcohol, pornography and non-tangible assets (more on Shariah-compliant finance here).

Many funds now come with a Morningstar rating of their sustainable investing.

As ever, it’s vital you look at the risk rating, charges and historical return of any fund to make sure it’s suitable for you and seek advice if necessary.

How can I switch?

Making your pension more ethical could be as simple as switching fund online.

If you go onto your fund’s website and log in they should show what ethical funds are available and explain how to move some or all your pension into them.

Switching fund rather than provider avoids problems with your employer, especially if they’re matching or increasing your contributions.

If you must switch, ask your scheme administrator or pension provider for a transfer value and check for any charges incurred when leaving, and whether you’ll lose features like life cover, for instance.

This article mainly applies to those with defined contribution schemes – if you’re on a defined benefit scheme, you should seek professional advice (this is mandatory for balances above £30,000).

If you want to learn more about retirement planning, why not have a read our comprehensive guide to pensions first?.

Considering cashing out your defined benefit pension? Read this first.

Are ethical pensions safe?

There are many types of ethical funds and so ethical investing isn’t necessarily more or less risky than a normal pension.

Ethical funds generally invest in equities, which are more volatile. This volatility is compounded by the screening process, explains Investing Ethically director Harman: “because you’re screening out 30-40% of the FTSE, potentially, you’re more concentrated in some areas.”

Ethical funds can be more volatile (image: Shutterstock)

Therefore, pension providers’ ethical funds should have a plan to reduce your exposure to volatility as you approach retirement.

In terms of returns, ethical funds have outperformed non-ethical funds in the last year and three-year periods. According to Moneyfacts, the average ethical fund is up 36% compared with 31% for the average non-ethical fund.

Over a ten-year period, ethical funds performed worse, however, although these numbers can be partially attributed to the relatively recent rise of ethical funds.

Just started saving? Royal London’s Helen Morrissey explains how to build a pension pot from your 20s, 30s and 40s.

The information included in this article does not constitute regulated financial advice. You should seek out independent, professional financial advice before making an investment decision.

Comments


Be the first to comment

Do you want to comment on this article? You need to be signed in for this feature

Copyright © lovemoney.com All rights reserved.

 

FCA Disclosure

loveMONEY.com Financial Services Limited is authorised and regulated by the Financial Conduct Authority (FCA) with Firm Reference Number (FRN): 479153.

loveMONEY.com is a company registered in England & Wales (Company Number: 7406028) with its registered address at First Floor Ridgeland House, 15 Carfax, Horsham, West Sussex, RH12 1DY, United Kingdom. loveMONEY.com Limited operates under the trading name of loveMONEY.com Financial Services Limited. We operate as a credit broker for consumer credit and do not lend directly. Our company maintains relationships with various affiliates and lenders, which we may promote within our editorial content in emails and on featured partner pages through affiliate links. Please note, that we may receive commission payments from some of the product and service providers featured on our website. In line with Consumer Duty regulations, we assess our partners to ensure they offer fair value, are transparent, and cater to the needs of all customers, including vulnerable groups. We continuously review our practices to ensure compliance with these standards. While we make every effort to ensure the accuracy and currency of our editorial content, users should independently verify information with their chosen product or service. This can be done by reviewing the product landing page information and the terms and conditions associated with the product. If you are uncertain whether a product is suitable for your needs, we strongly recommend seeking advice from a regulated independent financial advisor before applying for the product.