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How responsible investment could help engage DC savers

Our viewpoint

Time and time again we are told that young people want their savings invested in a responsible way. But when it comes down to it, very few choose to invest in this way.

In fact, the truth is very few pension scheme members choose to invest in anything at all and nearly all of them end up in the default strategy. Auto enrolment means the prospect of engaging a member in their investments is harder than ever.

Maybe we should accept defeat and conclude that members are never going to engage with their investments. But what would happen if we gave them what they want? Would members engage with their investments if they were sent messages about things they are interested in? If young people want to invest responsibly, what would happen if we invest responsibly for them?

Imagine the scenario, the default investment strategy you offer your employees now actively incorporates environmental, social and governance (ESG) considerations. This means that employees’ money is diverted from companies with poor ESG practices towards those with good.

Research has shown that, on average, these strategies perform at least as well as the traditional “invest in everything” approach used by most schemes now. The added advantage though is that you can send your employees messages about things they care about, such as:

“Did you know your savings helped reduce greenhouse emissions this year?”
“At the same time, they helped grow companies that are using sustainable methods of farming and production.”

These types of messages could be included in the annual benefit statements to make them more engaging. And maybe, just maybe, members would read them.

It’s not just members who need to engage with pensions, it's sponsors as well! Many of you may be of the view that the investment strategy of GPPs and Master Trusts is the responsibility of the provider. But most providers give you some control over the strategy used and some now offer an 'ESG' version of their default strategy or plan to soon.

ShareAction recently published a survey about some of the largest UK DC pension schemes. One interesting feature of the report is that it covered companies that use a Master Trust in the same way as companies that use their own trust. If this is a sign of things to come, then we can expect sponsors to be asked to explain their ESG policy regardless of the type of scheme they offer members. After all, few members will appreciate the difference.

All of this means the tide is shifting and soon companies could be expected to offer a default strategy that invests responsibly. Whether that's because members want it or because there is outside pressure from organisations like ShareAction, now is the time to start thinking about the type of strategy your scheme offers.

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