As businesses become more conscious of the impact they’re having on the world, many are turning to ethical workplace pensions.
But what exactly are they and how can you ensure the pension you offer your staff is ethical? In this guide, we’re going to tell you everything you need to know.
What Is An Ethical Workplace Pension?
Not many people realise that workplace pensions are a form of investment. When contributions are made they’re invested into various different companies. The aim is to grow these funds, so employees can build their pension pot on the lead up to retirement.
Unfortunately, not all companies would be classed as ethical. This is due to the fact many engage in questionable and/or harmful practices, such as fossil fuels, deforestation, and gambling.
Ethical workplace pensions (also known as socially responsible pensions or sustainable pensions) on the other hand, are investments that commit to a sustainable future, whether it’s for the planet, its people, or both. These aim to align the financial goals of individuals or organisations with their values and principles.
Why Are Ethical Workplace Pensions Important?
A good workplace pension is a great benefit, but by making it ethical it can become even better. Not only is it good for the planet and society as a whole, it can show that as an employer you’re:
- Up to speed with current affairs
- Interested in sustainability
- Invested in doing what’s right.
Ethical workplace pensions can make you more appealing as an employer. They give staff the ability to invest their hard earned money in a way that aligns with their own values. They also show you care about the bigger picture.
How Do Ethical Workplace Pensions Work?
How an ethical workplace pension is set up is similar to a regular workplace pension. You have a legal obligation to automatically enrol all eligible staff into a scheme, ethical or not. This is part of the governments auto-enrolment initiative, designed to help staff save for their retirement.
Each month you and your employees make contributions to the scheme. Contributions are then invested into a fund. It is here that the difference between a non-ethical and ethical workplace pension is apparent.
Non-Ethical Vs Ethical Workplace Pension
The primary difference between the two is the investment strategy and criteria used to select investments.
Pension funds can be unethical due to the industries the funds support. Some funds offered actively contribute to practices which are deemed as socially or environmentally unacceptable. For example:
- Gambling
- Fossil Fuel
- Alcohol & tobacco companies
- Weaponry.
Default Funds Vs Ethical Funds
In most cases, your workplace pension scheme will be automatically set to use a providers default fund. Although this fund may invest in some ethical companies, it won’t follow any strict rules in terms of ethical investing. As a result, your employees money could end up helping to fund the above industries.
If you want your workplace pension to be ethical, you must choose investment funds that follow certain criteria such as ESG (Environment, Social, Governance) or SRI (Socially Responsible Investing). Essentially, they will follow certain criteria to ensure investments go into funds which are environmentally and socially responsible.
EXPERT TIP 🤓
If you want your company pension to be ethical, you need to highlight this to your provider or pension adviser. The right steps can then be taken to ensure the funds within your scheme are ethical.
What Are The Benefits Of An Ethical Workplace Pension Scheme?
Many of us are becoming more conscious of how we can be more environmentally and socially friendly. So offering empoyee benefits such as an ethical workplace pension is a great option for employers.
Whether you provide a scheme that invests in ESG or socially responsible funds, an ethical pension can bring with it a number of benefits, including:
Attracting & Retaining Top Talent
Showing prospective hires you care about world issues can help you become a top employer. Why is that? Well, job seekers are being more selective about the businesses they work for. Many prioritise sustainability aspects when job hunting.
By offering an ethical workplace pension, you can attract the best talent during recruitment and remain competitive in your industry. It can also help you to hold on to the top talent you already have.
Contributing To Your B Corp Score
If you’re a business aiming for B Corporation status (B Corp), an ethical pension can boost your score. To qualify as a B Corp, your business is ranked on its social and environmental impact. When it scores 80 points or more, you’ll receive B Corp status.
Part of the ranking factors revolve around workplace pensions. If you offer ethical retirement plans of high value, the benefit increases your score. This then further bolsters your reputation as a top employer, helping to make positive change.
Increasing Employee Engagement
An ethical workplace pension lets employees invest in align with own personal values. This can lead to them becoming more engaged with you as an employer. Why? Because they can relate to you and feel more connected through these shared values.
Positive Brand Image
Providing ethical workplace pensions can also boost your company’s reputation and brand image. It demonstrates a commitment to social and environmental responsibility. It can highlight your views as a business, which in turn can help to attract customers and partners with similar values.
How Are Ethical Workplace Pensions Invested
Ethical workplace pensions use what is known as ESG (Environmental, Social, Governance) or SRI (Socially Responsible Investment) funds. But what are these?
ESG Investing
ESG stands for, Environmental, Social and Governance. It provides a set of principles for fund managers to look out for when investing in certain companies. This helps them to determine if they are ethical or not.
- Environmental
Evaluates a company’s impact on the environment. It raises questions about its sustainability practices. How does it address climate change? What does it do to minimise pollution? etc.
- Social
Assesses a company’s relationships with its employees, customers, communities, and society at large. Looks into its employee diversity and wellbeing. It also looks at any social responsibility initiatives it has
- Governance
Evaluates a company’s management and governance structure. This includes how its board and exec team are set up and the rights its shareholders have.
Typically companies will be given an ESG rating. This ranges from 0 to 100 and is used to assess a company’s sustainability and ethical performance.
Royal London are an example of a workplace pension provider who are actively looking at ESG factors when it comes to investing pension contributions. See what they have to say about responsible investing 👇.
ESG Vs Socially Responsible Investing
Socially Responsible Investing (SRI) is another type of ethical investing for your pension scheme. However, unlike ESG, it uses a broader criteria. This means it isn’t as strict on where workplace pension investments are made.
Rather than excluding whole industries such as oil and tobacco, SRI will choose the most ethical companies within it. ESG on the other hand would exclude the industry completely.
Choosing The Right Funds: Ethical Investment Screening
If you opt for a provider that offers ethical investments, typically they will carry out what is known as ‘Ethical Screening’ before investing contributions. This can be split into two types:
- Negative screening investment
Excludes investments in companies or industries that engage in harmful or questionable practices. For example, weapons manufacturing, tobacco production, or environmental harm
- Positive screening investment
Seeks investments in companies with strong ethical practices. For example, those committed to sustainable energy, fair labor practices, or community development.
Employer Led Vs Employee Led Investing
There are several factors you have to consider about how and where contributions are made. You can choose:
- Employer led investing
This is where you opt for ethical funds outside of the default fund, but all employees then invest into them. They can’t pick and choose the funds their contributions go to
- Employee led investing
This lets your employees pick their funds to suit their own ethical preferences. It’s important to note that although this gives employees more flexibility, they may not have the expert knowledge needed to make informed decisions which could result in poor choices.
Before making any decisions about how and where workplace pensions are invested, it’s always best to speak with an expert. They will be able to talk you through what’s best for your business.
What To Consider When Choosing An Ethical Workplace Pension?
While ethical pensions aim to invest in companies that support positive change, there are a few things to consider when looking for one, such as:
Alignment Of Values
Firstly, it’s important to check that an ethical pension scheme aligns with the values and culture of your company. This is because all ethical pensions will invest in different ‘ethical’ industries. For example, you want to make sure that if your focus is on sustainability, the funds you choose are too.
Employee Demographic
Individually, people are making an effort to invest ethically. While people can pick an ethical fund to suit them, it’s a harder task for most businesses.
There are a variety of investment funds to choose from. But you have to consider conflicting interests within a workforce. What one employee deems as ethical another may not.
In some cases, employees may not want to invest in an ethical fund at all. It’s important to understand staff values otherwise the portfolio you opt for could end up excluding some.
Diversification
Diversification protects your employees’ investment if one industry suffers but others perform well. However, with ethical funds, there are fewer options for diversification.
It’s key to evaluate the range of investment options within the ethical pension scheme. Diversification is essential to reduce risk. Make sure the scheme provides a range of choices. This will help to cater to different risk appetites and financial goals of your staff.
Like with any investment, it’s important to check previous performance. Checking fund performance will help to ensure that you invest in areas which yield high returns for your employees. If you know a fund has previously struggled to provide good growth, you can avoid it.
Greenwashing
This is a fairly new concept as more and more businesses aim to be eco friendly. Greenwashing refers to a company labelling a service or product as ‘ethical’ or ‘sustainable’, but it isn’t clear whether the organisation is truly ethical.
Ethical pension fund managers face no official standards when labelling a fund as ethical. To ensure you pick a scheme that is, it’s important to do your own research. The best way of doing this is through the schemes fund factsheet. This will detail the different funds available and explain investment objectives.
EXPERT TIP 🤓
Greenwashing is a marketing tactic convincing customers that a company is sustainable, when in actual fact, it isn’t as good as it says it is.
What To Avoid When Picking An Ethical Pension
Following on from the greenwashing tactic, there are a number of other red flags to look out. Should you notice any of the following, it may be an indicator that the scheme isn’t as ethical as it promises to be.
You should try to avoid:
- Funds that aren’t transparent
If you can’t find any information about a pension fund, such as where the money is invested or its sustainability policies, there’s not any guarantee that the pension fund is ethical
- Funds invested in carbon-intensive sectors / harmful industries
We’ve already given you some examples of these. But if pension funds invest in companies that negatively impact the planet or promote war, violence and addiction, it’s a red flag
- Ethical funds with unethical industries in its top 10 holdings
If your ethical pension fund includes any of the many ‘unethical’ sectors, such as weaponry, fossil fuels, and gambling, in its top 10 holdings, it’s not as ethical as it seems.
How To Check If A Workplace Pension Scheme Is Ethical?
Questioning whether your current workplace pension scheme is ethical?
It’s likely that the scheme you have in place is unethical in terms of how contributions are invested. If you want ethical fund options, you have to request this from the provider.
To determine if a workplace pension is ethical, you can take the following steps:
- Review a providers investment criteria
If providers offer ethical pensions this will usually be stated in their investment criteria. Typically there will be a statement committing to investing inline with ESG principles
- Examine the funds on offer
Review the funds offered by your provider. Look for those explicitly labelled as ‘ethical’ or ‘sustainable
- Seek transparency
Look for transparency in documentation when it comes to your providers investment decisions. Do they clearly state how investments are selected, or the criteria they follow for ethical investing?
- Look for industry exclusions
Ethical pension providers will often exclude whole industries from their investment options. Verify if your provider has any exclusions e.g. tobacco, fossil fuels or weapons
- Check your annual statement
The annual statement provided by your pension provider breaks down how money is invested. The fund factsheet will also include asset allocation
- Seek expert addvice
Consider speaking with a pensions expert who can help you identify if your current scheme is ethical. Experts know the market inside out and will be able to tell you which providers tend to offer ethical schemes.
Need Help?
If you discover your current set up isn’t ethical, don’t worry. You can look to see if your provider offers more ethical funds, or worst case scenario? You can look at switching your workplace pension to a new provider that does.
This can be a daunting task, which is why the team at Drewberry are on hand to help. Just give us a call on 02074425880 or email help@drewberry.co.uk.
Are there any downsides to ethical pension investments?
The very nature of the investing is risky, there’s no escaping it. No matter what your staff invest in, there’s always the risk of the value decreasing over time. This comes part and parcel with investing. But that’s not to say ethical investments perform any differently from other funds.
The main issue is the lack of diversification within ethical funds. As there are less options, the diversity isn’t as strong as other fund options. This could impact its performance.
It also takes longer to build an ethical portfolio than a traditional one, but the extra effort can pay off. Offering ethical pensions can help businesses build their reputation as a sustainable workplace.
What is the best ethical pension?
There’s not a one-size-fits-all approach to ethical pensions. It’ll depend on your company’s requirements and your employees’ preferences. How you view sustainability as an employer plays a part, too. A fund you might believe to be ethical, others might not.
While all pension providers are not completely ethical, they do have options. Our experts can point you in the right direction and help find ethical pension funds for your team.
Do ethical workplace pensions offer good investment returns?
There’s a misconception that ethical investing doesn’t yield high returns. While you can’t predict how a fund may perform, there isn’t any clear evidence to suggest sustainable funds underperform compared to non ethical funds.
UK Ethical Workplace Pension Providers
There are several ethical workplace pension providers in the UK. Each has its own investment criteria and approach to ethical investing.
With this in mind, it’s important to do your research. The best workplace pension for your business will align with your ethical and financial goals.
To help you get started, here are some of the UK’s top ethical workplace pension providers.
- Aviva’s Stewardship Funds
- Aegon has over 200+ ethical pension fund options
- Royal London has 1 true ethical fund and 6 ESG funds, including Sustainable World Trust
- Scottish Widows has 6 ethical pension funds, including Scottish Widows Ethical CS7
- The People’s Pension has 1 ethical option, but all other funds have ESG elements.
IMPORTANT NOTICE❗
Ethical funds are neither black or white. There are lots of options. Some may be more ethical than others. But it also depends on how a company perceives something to be ethical.
Compare Ethical Workplace Pension Schemes & Get Expert Advice
Pensions are complicated beasts to tackle. With so many options to consider, it does become overwhelming at times. But it’s so important to compare the pension providers on the market. This extends past setting up your pension, it’s also key when determining a company’s ethics.
If your business is focusing on sustainability, an ethical pension provider can support your goals. If you’d like to chat to one of our advisers, please don’t hesitate to call 02074425880 or email help@drewberry.co.uk.
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