A mix of factors have shone the spotlight on responsible investing in workplace pensions in recent years. These include the Covid-19 pandemic, the need for people to be financially secure in retirement, and customers wanting to know where their retirement savings are invested, as well as governments introducing regulations to help countries move to a 'greener' future. We'll look at each of these factors in more detail below.

Pandemic

Covid-19 helped put the spotlight on responsible investment

The Covid-19 pandemic has put an even sharper focus on how companies behave in environmental and societal terms, and on the firms that people’s retirement savings are invested in. For example, greater attention is being paid to how companies treat their staff and their customers. Covid-19 has also raised serious questions about firms’ supply chains, their approaches to diversity, and their policies on sustainability, such as plastic pollution.

Automatic enrolment

Automatic enrolment creates millions of shareholders

Workplace pensions have the potential to be real drivers of change in the ESG space for many reasons. The most obvious is automatic enrolment and the fact that millions of working age people in the UK are now shareholders in the companies that their employers’ pension schemes invest in, primarily through default funds. Another reason is the length of time people pay into their pensions – up to 40 years in some cases – and that’s plenty of time for change, not only at a company level, but more importantly at an industry level as we move to a carbon-free world.

Default pension funds

Default funds can be the engine room of ESG

People that don’t choose their own pension investment funds are probably in a default pension solution, in which the decisions about where pension savings are invested are made on their behalf. With billions invested in these funds through auto-enrolment, Aviva called on the government to pass a law requiring auto-enrolment default pension funds to achieve net-zero carbon emissions status by 2050 to help to address the challenge of climate change.

New regulations

Regulatory power focuses more attention on ESG

Regulatory power has helped put climate-related issues into company boardrooms across the globe. We can’t list every instance here, but a good example of what’s happening at the executive level is the Financial Stability Board, which established the Task Force on Climate-Related Disclosures (TCFD). The TCFD develop recommendations for more effective climate-related disclosures from companies that will allow them to better understand the financial implications associated with climate change and empower them to move to more sustainable solutions, opportunities, and business models.

Pension providers

Aviva’s focus on ESG issues

As a business that has been operating for more than 300 years, here at Aviva we have consistently tweaked the purpose of our investments - so how and why we invest – to reflect what's happening in the wider world. And as a major workplace pension provider, Aviva has set out its ESG-related aspirations with clarity and conviction. For example, we set a new 2050 net-zero carbon emissions target for our own auto-enrolment default pension funds, making it easy for auto-enrolled pension savers to link their pensions to the low-carbon transition taking place.

This move is aligned with the Paris Agreement and the UK government’s own net-zero target. Aviva is committed to making progress towards the net-zero target as quickly as possible and is exploring the feasibility of a 2030 target, in-line with the Intergovernmental Panel on Climate Change (IPCC) 1.5-degree pathway. As part of our net zero strategy, we are planning to invest more than £5 billion across our default funds in businesses that are less reliant on fossil fuel and also in businesses in the renewable energy sector that are helping with the move to a greener future. We will then look to increase our investment in this area after that.

Workplace pension scheme members

Strength in numbers

Many workplace pension scheme members are interested in what investing responsibly means and some can be passionate about the issue. Although people with workplace pensions do not represent a lobby group or campaigning organisation, the financial muscle of private pensions is immense. The most recent estimate by the Office for National Statistics put the figure at £6.1 trillion, 42% of Great Britain’s total wealth. 1

The adage ‘strength in numbers’ applies here; greater numbers of people have the potential to take an active interest in what is happening in the world around them, and demand change. Pension providers, asset managers and the corporate sector are all ready to listen, and many key players – like Aviva – are already taking action as you read this.