Pension funds increasingly need to take account of their members’ concerns about ESG factors.
This is new ground for many plans and there should be a balance in doing so, says Jo Sharples, chief investment officer of defined contribution solutions at Aon.
She explained that when members’ opinions are asked, there is a risk that only the most committed or interested members will respond.
Pension funds must go beyond simply operating in “transmission” mode
“As a result, these opinions may be those of a small minority rather than those of the membership as a whole,” she says.
Many members think their employers invest ethically
There is also a financial aspect to consider because directors have a fiduciary responsibility to members, Sharples notes.
Maria Nazarova-Doyle, head of pension investments and responsible investing at Scottish Widows, agrees, explaining that the main role of a pension provider is to ensure the financial security of retired members.
She emphasizes that this is all the more important since the majority of savers are in default strategies, which makes the pension fund more responsible.
Sharples and Nazarova-Doyle, however, argue that fiscal responsibility can go hand-in-hand with member concerns and ESG efforts.
“A responsible investment strategy can create long-term sustainable benefits for everyone,” says Nazarova-Doyle.
In terms of timing, there are arguments in favor of taking ESG considerations into account in good time.
Kirsty Moffat, DC Engagement Manager at Hymans Robertson, advocates raising this topic early on in anticipation of changing expectations.
“In member surveys we’ve conducted, a large proportion of members say they believe their employer will invest their retirement savings in ethical and ESG-friendly funds,” she says.
She warns that for pension funds where this is not the case, it can often lead to a “disconnect” between members and their scheme.
Stepping stones to understanding
Raising ESG issues may require training for members, says one expert.
Georgia Stewart, co-founder and chief executive of Tumelo, a tech company that facilitates member engagement on ESG issues through voting platforms, says pension funds must first make sure members understand where their money is invested and how it is managed
Moffat adds, “Previously, especially in a world of defined benefit pension plans, members didn’t know what they were invested in, and pensions were something you only thought about in retirement.
“Today, with everything digitized, members can see the size of their pension pots with the click of a button.”
She explains that this is also leading to an increase in ESG inquiries from members as they increasingly see the introduction of ESG investment options into DC default strategies and self-selected fund ranges. .
But data remains an issue when educating members because data from fund managers can often be inconsistent.
There are other reasons programs should be wary, Moffat warns. “Providing more information to members can invite deeper scrutiny from members and ultimately more work for the plan,” she says.
Here, Sharples suggests that if data isn’t available, pension plans can consider sharing case studies with members instead.
“These can tell a story for members and don’t necessarily require data, helping to address some of the data challenges we’re seeing while also sending a really positive message,” Sharples says.
A “two-way dialogue”
Once members understand their investments and how ESG considerations are integrated into them, the core of member engagement is communication, according to Stewart.
“Pension funds need to go beyond just operating in ‘transmission’ mode, where they send out an annual report on what they have done; they need to have a continuous, two-way dialogue with their members,” she says.
Stewart adds that pension plans as a whole find it “extremely difficult” to guess how members would like them to vote on different ESG issues.
This is made difficult by shifting views over time and the fact that members may vote very differently from resolution to resolution, “even on seemingly very similar issues,” she says.
Members’ opinions may be influenced by the world around them. Nazarova-Doyle explains that socio-economic shocks, such as the Covid-19 pandemic and the ongoing war in Ukraine, can change member mindsets and values. This makes ongoing dialogue crucial.
Occasional online polls and annual member forums have taken over from the former member-appointed administrator, and are even now being replaced by even more interactive technology.
Putting asset managers under pressure on ESG: engage or trade?
Swapping fund managers can be a painstaking process, but some pension funds are willing to consider it if asset managers don’t measure up to environmental, social and governance factors.
For example, Nazarova-Doyle explains that Scottish Widows has launched a tool in its app called “Find your impact”, through which it can ask members questions about their fund range, as well as management priorities and fundraising activities. engagement with portfolio companies.
Sharples says it’s often easier to consider members’ views on broader ESG issues, such as climate change, than on specific issues such as whether to invest in a certain company .
“Once you’ve decided which viewpoints/concerns to take into account, it’s then a matter of deciding where to incorporate them into the investment strategy,” adds Sharples.
“For more specific views, this can be done more easily through the range of self-selecting funds.”