Member engagement has always been important, could you summarise why it’s arguably even more important now than ever?
With the last few years being one of the toughest economic climates in decades from the pandemic to overseas conflict and global economic instability, we believe it’s important that members are aware of how their pensions can help influence some of the most critical factors affecting their lives.
Our latest research highlighted that that knowledge is power when it comes to understanding how pension investments may offer savers a way of influencing some events that they might previously have considered to be way beyond their control.
Once members understand how their investment funds link to wider environmental and societal issues through the power of shares, most of our members become more interested in their pensions. This isn’t just good for them in terms of engagement, but it’s good for the companies in which their provider invests and good for the provider itself.
For instance, we used case studies to help bring the power of pensions to life in the minds of pension members. When we showed our members these examples of how we at LGIM have worked with companies to encourage them to do better on issues such as reducing carbon emissions or paying the real living wage to their employees, 81 per cent said they’d be more likely to engage with their pension if they’d known it was being used in this way.
Since the UK Government introduced the Mansion House Compact, we’re seeing an increase in discussions around illiquid investments in DC default funds. But would DC pension members want these type of investments?
Legal & General was one of nine leading UK pension providers who signed up to the Mansion House Compact in July, committing us all to allocating 5 per cent of assets in our default pension funds to unlisted equities (illiquids) by 2030.
Although ‘illiquids’ as a term is probably unfamiliar to DC pension members, we found that a majority of the 3,634 that we interviewed in the accumulation phase in the UK said they’d be prepared to pay higher pension fees to have them – once they understood what these type of investments could potentially mean in terms of helping to mitigate long-term ESG risks to the economic security of the UK.
For instance, when asked if rising prices had made them think harder about investing in renewable energy and sustainable food production, most respondents said it had, with 65 per cent saying it had made them more interested in sustainable energy and 74 per cent saying rising food prices had made them more interested in sustainable food sources.
And 72 per cent said they’d pay higher pension fees to support infrastructure projects to increase renewable energy sources such as wind farms or solar parks.
Despite some understandable reticence about possible risks to the long-term financial health of their pension pots, our DC savers tentatively support the concept of ‘green finance’ (loans or investments that promote environmentally positive activities).
Around half have heard of green finance and once it’s explained, six in 10 say they’d pay higher pension fees to support it. So it seems that certain types of illiquid investments would chime with DC members as a way of giving them a stake in helping to shape the world into which they’ll eventually retire.
How would you say the cost-of-living crisis has impacted members views on ESG investing?
We expected to find in this year’s investigation into the ESG (environmental social and governance) views of DC pension members that the cost-of-living crisis was making savers more cautious with their cash.
However, as mentioned earlier, we found that most would pay more for investments which could make them less vulnerable to long-term financial risks. This is noteworthy given that our survey was carried out at a time of rising prices, and just months after the Office for National Statistics estimated that consumer price inflation was the highest in more than 40 years.
Yet, there’s a difference between being prepared to pay more up-front in fees and accepting a potential dent in your savings when you come to retire.
In most cases, while a hard core of DC savers might be sanguine about the effect on their savings, most respondents waver in their support.
For example, despite that figure of 72 per cent of savers supporting investments in infrastructure projects to increase renewable energy sources such as wind farms or solar parks, well over half (56 per cent) would only back paying higher fees if there was no long-term impact on their pension pots.
As many more start to connect the dots between financial risks and poor ESG practices, this picture could well change. But for now, especially in these tough economic times, there remains an understandable element of cautiousness around anything that might affect long-term pension performance.
The key will be for all of us involved in the pensions industry – whether regulators, providers or employers – to work together on filling the knowledge gap around pension investments so scheme members understand that there’s much more to a pension fund than providing a retirement income. Pension investments can also support projects that could make the UK less dependent on global factors affecting economic stability.
Do you think that in the current economic climate, pension savers are focused on ESG issues when it comes to their pensions?
We found that despite their own financial troubles, most of our DC savers want to see action being taken to tackle climate change (80 per cent). Many worry (71 per cent) that climate change will push up prices even further with women particularly concerned (76 per cent compared with 68 per cent of men).
With most of our DC members saying they’re familiar with the term ‘net zero’ in relation to climate change, (85 per cent), around six in 10 (58 per cent) say they’d be prepared to pay more in fees for a pension with net-zero targets.
By no means all of our DC pension savers support investing in funds which support ESG objectives. However, our respondents are generally prepared to consider these issues as worth incorporating into long-term investment strategies.
It’s a similar picture when it comes to supporting the switch away from investing in fossil fuels with 87 per cent saying they’d like to see their pensions significantly reducing their exposure to the fossil fuel industry.
So, while nine in 10 of those we interviewed have felt the effects of the cost-of-living crisis, the rising prices appear to have made them think harder about issues that may threaten long-term economic stability and are concluding that it probably makes sense to invest in schemes and businesses which aim to help mitigate the risks of ESG mismanagement.
Of course, it isn’t a slam-dunk for ESG at any price and we wouldn’t expect it to be. But mostly, our DC members seem to be growing increasingly keen to use the power of their pensions to change behaviours that seek to help change the world for the better. And that, as an indication of the trajectory of member support for ESG investment principles, looks very much like a green light to us.
*Source: Legal & General Investment Management (LGIM) survey in June 2023 of the views of 3,634 defined contribution workplace pension members on environment, social and governance investing. Respondents were split across generations and genders and across the UK.
