Wide variations in performance, risk, charges and attitude to environmental, social and governance factors are making life increasingly complicated for workplace advisers recommending schemes. As the DC market evolves, the range of factors advisers and consultants are expected to embrace when making recommendations, and the sheer volume of information and data now available for their consideration, is making the job of workplace pensions adviser increasingly complex.
With auto-enrolment now in its sixth year, performance figures are beginning to emerge, showing some big variations in returns and risk. Still only a handful of the defaults covered in a new report carried out by Defaqto have five years’ performance to report. However, a majority do now have three-year returns. Most are clustered between 9.3 per cent and 11.8 per cent annualised returns for the three years to the end of September 2017, but the two outliers were Standard Life, which delivered a 6.6 per cent annualised return over three years, and Now: Pensions, which managed just 3.1 per cent. This marks a slight improvement on the 2.8 per cent annualised return from Now: Pensions in the period to June 2017, identified in default fund research published by Corporate Adviser last December. The risk taken to achieve these returns also varied widely, as too did the performance benchmarks adopted by schemes, making comparisons between options extremely complex.
The research found schemes’ performance benchmarks are spread across four key groupings – ABI Mixed Investment 40-85 per cent Shares; a composite benchmark; cash or inflation plus 3 to 4 per cent a year; or no performance benchmark at all, but volatility targets instead.
The Defaqto research also highlighted the extent to which mainstream default funds are failing to take any account the increasingly high-profile issue of ESG approach in their
investment processes. Of the 19 major providers’ defaults it surveyed, only three had any acknowledgement of ESG factors on their factsheets or corporate websites. Willis Towers Watson recognises ESG factors in its statement of investment principles, but leaves implementation to the discretion of the investment managers. Nest was found to hold ESG factors as core to its investment strategy and holds ESG-screened funds alongside funds that are not ESG- screened. It also exercises voting rights and engages with company management. Now: Pensions has a policy of social responsibility in investments.
This lack of ESG emphasis seems behind the times as momentum behind ESG investing in DC grows. An increasing number of voices are arguing that the industry needs to move from talking internally about sustainable investment practices to using the goodwill it generates as a tool to engage members.
Research carried out by Ignition House for the DC Investment Forum (DCIF) highlights the potential risk of paying little or no attention to ESG factors. It found that pension savers are making responsible choices in their daily lives but are shocked to find out where their pensions are invested.
The DCIF research found 87 per cent of pension investors are trying to reduce their use of plastic, and 71 per cent buy from sustainable brands, such as those certified by Fairtrade. Yet in one-to-one interviews conducted as part of the research, members expressed shock at the discovery that their money could be invested in tobacco manufacturers or companies that underpay their staff, or overpay their chief executives. The researchers described ‘amazement’ at the idea that members’ pension savings may not automatically be invested with responsible investment principles in mind.
The report argues that making the connection between ESG issues and their pension savings could be the key to greater engagement with young savers.
The DCIF research found 80 per cent of 22-34-year-old savers are much more interested in environmental issues today than they were five years ago. Three quarters said they feel more strongly now about making sure that companies are well managed.
DCIF chair Annabel Tonry argues: “Making people aware that the way their pension money is invested has a real-world impact could be a powerful tool for better engagement. If savers understood more about how their money is invested, they might feel more anchored to pensions and investments.
“The DCIF’s membership of investment managers are committed to ensuring the best possible returns for savers. A whole range of issues are material to investment returns, from ensuring that companies are paying their senior staff salaries that are commensurate with the results they are achieving, to addressing climate change.”
ESG may be seen as flavour of the month by some – but it looks set to be added to the growing list of DC scheme selection factors.