Legal & General Pathway funds will now take into account environmental, social and governance (ESG) risk factors as part of its stock selection process.
As well as making these funds more sustainable, LGIM will also increasing the allocation to growth assets in the earlier accumulation phase of these target date funds. It will also de-risk at a more gradual pace. LGIM says that these changes are designed to deliver improved levels of income in retirement.
These target date funds are typically used as default options with DC arrangements. LGIM says this change was partly in response to feedback from pension scheme members who have shown increased interest in more sustainable investment options.
LGIM says these various changes will also ensure better alignment with the Financial Conduct Authority’s retirement pathways, and its own ‘four pots for your retirement’ concept.
In order to give these pathway funds more of an ESG tilt, LGIM will use its own Future World Multi-Asset Growth fund as a core investment. This future world fund range uses explicit ESG criteria as part of their stock selection process.
LGIM’s head of defined contribution Emma Douglas says: “Our members are telling us that they want their investments aligned to long-term sustainability goals.
“In our most recent survey of scheme members, 53 per cent said they would engage more with their pension and 57 per cent would feel more positive about their employer if they knew their pension was making a positive impact.
“As one of the largest pension providers in the UK, we have a key role to play in giving savers this choice. While all our assets are responsibly managed, we are now integrating our Future World Multi-Asset Fund into the investment glide path as this fund explicitly uses ESG criteria and will now be a core component during the growth phase and into retirement.”
Douglas says that the asset manager wanted to align its pathway funds its its evolving retirement proposition.
“Next year, our retirement framework will be expanded to implement the FCA’s retirement pathways and further develop our ‘four pots’ concept. This is designed to provide a simple framework to help members allocate their money across four different spending needs and target an income level to meet their individual retirement goals.”
LGIM says that during the earliest phase of the glide path, up until about 30 years from retirement, the funds target higher growth by holding a pure allocation to equities, using the L&G Diversified Multi-Factor Equity Fund. This holding is combined with a two-thirds allocation to the Future World Multi Asset Fund (FWMAF) to provide diversification benefits. As members move into the ‘steady growth’ phase, at around 20 years from retirement, the holding in the FWMAF increases to 100 per cent.