Saving for a better future
If you keep up with MoreThanNow via our newsletter or LinkedIn, you will know we’re breaking new ground by looking at how employers can fulfil their sustainability strategy goals while so many colleagues are working from home. Another highly impactful we’re pursuing is to help people think about sustainable investment – in particular of pensions. We’re calling for partners to run experiments with us so we can find the best ways of increasing investment in sustainable pension funds.
“Can you put a price on a green future? When you think about it, we already do.”
Most of us automatically put money into our (growing) pension pots. In fact, pensions autoenrollment is arguably one of the biggest successes of applied behavioural science, encouraging millions more in the UK to save towards their future. We know this money is important: we all want to have a comfortable retirement. And yet, few of us engage with this money in the same way we might do with our other savings. One reason is that pensions are locked away, and we cannot (and arguably shouldn’t) touch them until we actually approach retirement. But just because we cannot easily take money out of our pension yet doesn’t mean we cannot use this pot of money for good – for ourselves and for the planet!
It is unclear exactly how much money we have saved up in pensions, but estimates of the average UK pension range from £50,000 to over £200,000. That is a lot of financial firepower invested in the world around us. Investment professionals are increasingly looking at how portfolios, including pensions, can use our investment to produce Environmental, Social, and Governance (ESG) benefits. This interest is driven by individual savers and investors. For example, a survey of Nest pension members found that 73% wanted their pensions to be invested responsibly. Similarly, a UK government survey found that more than half of UK residents (52%) say we would save more if we knew that our money is making a positive difference. Among young adults, this figure rises to two in three (67%).
One thing is clear: public sentiment is swinging ever more in favour of sustainable investment.
How might the companies you invest in the impact the UN sustainable goals? From the UK Government’s Investing in a Better World Report, 2019
In response to this increased interest for sustainable investments, providers are incorporating ESG considerations in existing funds and creating sustainable pension funds we can invest in. Campaigners such as Make My Money Matter (founded by screenwriter Richard Curtis) are encouraging providers to do even more. The average pension maps to up to 1,000kg of greenhouse gas footprint. Considering the overall size of the footprint is around 16,000kg, an individual’s choice of pension funds can make a significant difference.
And such investment may be smart for individuals too. An academic study found that fossil fuel does not outperform alternative investment, and just last month Morgan Stanley reported that sustainable funds financially outperformed its traditional peers in 2020. As responsible and sustainable funds become more common and seem to outperform more traditional funds, we might expect individuals to switch to a more sustainable alternative. This has not happened at scale yet – the vast majority of us (90-95%) stick with our pension’s default plan - but we believe that it should.
The reliance on the default in pensions is easily explained when we think about how few of us actually think about our pension and check our provider’s portal regularly. Engaging people with their pension is one of the most pervasive challenges pension providers face. For most people, retirement is far away and more immediate (financial) considerations seem more important. This is particularly true for those early in their career, for whom pensions often seem even more remote. Young people are among the hardest to reach by pension providers, even though saving at an early age means you benefit more from compounding interest. Finding a way to engage people with their pension can encourage them to think about the future and where their money goes, and to make active decisions rather than staying with a default (which probably isn’t enough to have a comfortable retirement for most of us).
“The average pension maps to up to 1,000kg of greenhouse gas footprint.”
In summary, we see a great opportunity for pension providers and employers: engaging savers with their pension by encouraging them to consider choosing sustainable funds. This is a major behavioural challenge, but a focus on responsible investment has tremendous potential to help change the future of our world and that of future generations. Additionally, environmental sustainability is a key concern for young adults in particular. Focusing on leveraging pensions to drive sustainable outcomes could help increase interest in pensions among this hard-to-reach group. With a bit of luck, it might encourage them to save a bit more as well.
Whether we see it this way or not, our pension investment helps to shape our legacy. Increasing the uptake of responsible pensions investment can help us address climate change without sacrificing our financial future.
Want to find out more? Get in touch and let’s work together to find the most effective approaches to engage people with where their money is invested (and help you achieve your sustainability and engagement goals in the meantime).