ESG integration into DC investment options also lags behind
LONDON (26 March 2020) – Aon, a leading global professional services firm providing a broad range of risk, retirement and health solutions, has said that results from the UK Defined Contribution Pension Survey 2020 show that presently a mere 6% of schemes would like to extend their range of investment options to incorporate additional asset classes beyond those currently available from the DC platform.
The How do you measure up? UK Defined Contribution Pension Survey 2020 gathered responses from over 200 UK defined contribution (DC) schemes, covering more than half a million members and
£50 billion in assets, and asked questions on how they assess the effectiveness of various key aspects of their DC schemes.
Chris Inman, head of DC Investment Advisory at Aon said:
“The finding that the vast majority of DC schemes are comfortable with the current asset classes and strategies available to them came as a surprise given the industry’s focus on exploring ways in which DC members can benefit from a more diversified set of investment opportunities.
“The diversification, inflation linkage and downside protection that some of these strategies – such as infrastructure and private debt - can provide are currently missing from the ‘DC friendly’ universe of assets.”
Alternative assets are areas that have been identified as lacking from DC strategies in the UK, especially when compared with more mature markets around the globe. There may be various reasons for this.
Chris Inman continued:
“Adding alternative asset classes to a DC scheme’s range of investments can seem extremely challenging. Some schemes may feel that their current governance structures or knowledge levels are not suited to monitoring these types of investments effectively. There may also be concerns about potential delays in accessing illiquid investments when schemes need to pay benefits.
“Schemes should be confident that these issues can all be solved by discussing and getting a better understanding of how alternatives can fit into their DC investment strategy - and will help improve diversification and outcomes for their members.”
Responsible Investing is gaining increasing importance for DC schemes. In addition to growing societal pressure, the Pensions Regulator now requires trustees of all DC schemes to state their policy on financial and non-financial matters in relation to environmental, social and governance (ESG) issues with further changes due later this year.
However, the survey reveals that the most popular approach, taken by around two in five schemes, is to offer just one or more self-select ESG investment options to their members - either through design or based on their provider’s standard offering. Only half as many again, then actively incorporate ESG principles on behalf of members, either through investment as part of the default option (8%), or by assessing all funds offered against ESG criteria (10%).
Joanna Sharples, partner at Aon said:
“The result that a mere 10% of respondents assess all their DC investments against ESG criteria, while only 8% incorporate investment in one or more ESG specific funds within their default strategy, is rather underwhelming.
“Our 2019 Responsible Investment Survey found that over 85% of UK investors consider Responsible Investing to be at least ‘somewhat important’, with the majority of savers saying that they would be more engaged with their pension savings as a result of responsible investing.
“Additionally, Aon’s partnership research with the University of Cambridge Institute for Sustainability Leadership (CISL), shows that there is a strong preference among savers to avoid funds rated poorly on sustainability. This message came through regardless of age, salary, savings level, etc.”
Joanna Sharples continued:
“All our research indicates that there is a remit to do more in this area. Schemes that can share ‘good news’ with their members about how their pension savings are working to make the world a better place, as well being invested to grow, should be able to engender pride and raise engagement with their members.
“Our hope is that while responsible investing as a whole is currently considered ‘special’, or even a ‘fad’, by some, as time passes this will just become a normal part of a considered investment strategy.”
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