Auto enrolment means your workplace pension contributions are now taken care of automatically- hurrah! That makes life easier. Unfortunately though, auto enrolment also means part of your salary may be backing companies whose practices you find objectionable unless you actively ask for your money to be moved.
In fact, there is a very good chance the default pension scheme your employer has chosen for you will mean you are investing in companies in the oil industry and the tobacco industry. Other mainstream investments you could find you and your pension invested in include the arms trade, pornography or gambling industry.
This issue was recently flagged by ShareAction, the responsible investment watchdog, which surveyed the major auto-enrolment pension providers and found six out of nine fail to take stand on weapons investment and seven are lax on tax avoidance.
If you have no problem with that, then happy days. However, if the thought irks you I’ve found a top-notch financial adviser with a few tips to get your workplace pension looking cleaner and greener.
First though, a quick explainer as to why the default options tend not to be the ethical ones.
All pension schemes come with a fee for managing them. The financial regulator wants to make sure savers are not ripped off so has said the default pension scheme chosen by an employer can cost no more than 0.75% of the amount being put aside.
A consequence is pension providers deciding where to invest your money need to look at cheaper options such as funds which track the market rather than being actively managed. These tracker funds can be very low cost but are rarely discerning in terms of the types of companies they invest your money in- that decision is determined by an algorithm.
Finance experts will tell you the price of green or ethical investment options is coming down, but for the moment they are pricy enough to mean they don’t usually make the cut for default pension schemes. This doesn’t mean a greener pension needs to be more expensive though. Pension provider NEST has an ethical option which has the same annual management fee as its default fund.
Step one on the cleaning/greening your pension is chat to your employer about whether it has set up an ethical pension option with its chosen pension provider. If your employer has already done this all you need to do is take a closer look at the ethical option and see if it is what you’re after.
“Most of the big providers have at least one ethical option for you but it depends on your outlook,” says Jeannie Boyle, director at financial advice firm EQ Investors.
She recommends when looking at the ethical fund provided by the pension provider, you check it not only screens out negative things, like tobacco or fossil fuels, but it also looks for positive behaviours from companies, in which it invests.
“A lot of these are screening out some negatives but mostly they are taking into consideration positive environmental, social and governance (ESG) factors. Basically, looking at how the company is run, rather than their products and services.
“Using an ESG approach could mean investing in an arms manufacturer that looks after staff very well, for example.”
“They are also not usually looking for positive impact, most still invest in oil.
“An impact approach to investing looks at the product or service of a company and only invests if it has a positive impact.
If your employer has no ethical default pension option set up with the pension provider you can contact the provider directly to find out what is available and if there is an additional cost.
You can have a look at the provider’s website for all the information on its ethical fund options and you can instruct them to switch your workplace pension fund, if you like what you see.
But what if the provider has no alternative or if their version of ethical isn’t clean or green enough for you?
Jeannie says at this point it is worth considering a self-invested personal pension (Sipp).
“You could take the money you have saved into a workplace pension and move it into Sipp, one that you or an adviser would then manage. Bear in mind costs can be more expensive with Sipps but it can be easier to meet your ethical criteria.”
Sipps offer more flexibility in terms of funds you can invest in than other types of pensions.
But Jeannie warns not to throw the baby out with the bath water by ditching your workplace pension.
“You have to keep the workplace pension open because most employers will not make contributions elsewhere- it is too much of a faff for them, so they will want to stick with the employer-nominated pension scheme.”
“Also you do not want to lose the matched contributions the employer makes into your pension.
“We often find people have a workplace pension that they and their employer pay into but they move it into a different pension once in a while- once they meet a certain balance.
“The other pension could be something they have selected themselves and they know it has the right ethical balance for them. They could find it themselves or via a friendly financial adviser.
Lastly, Jeannie has a risk warning for those looking to take control of their pension.
“Think carefully about investment risk.
“It is important that people don’t end up taking more risk than is appropriate. Equity tends to be more volatile so they should probably should not be entirely invested in an equity fund if they are close to retirement and drawing from their pension fund.
“They might want to combine that with another type of fund so the portfolio is diversified.”
Remember, no employer or pension provider will be able to offer advice, they can just tell you the available options. Only a regulated financial adviser can give you a personal recommendation. And if your pension pot is worth more than £30,000, then legally, you must seek advice before moving it.