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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.
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.
A good Workplace Pension is a great benefit, but by making it ethical it can become even better. 70% of employees say it’s important their pension contributions get invested ethically. So not only is it good for the planet and society as a whole, it can show that as an employer you’re:
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.
A study by KPMG found 1 in 2 employees want their employer to show “commitment to ESG (Environmental, Social, Governance)”.
While 20% of individuals have turned down a job if the company’s ESG commitments were not aligned with their own.
Joseph Toft
Senior Consultant, Employee Benefits
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 government’s 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’s here that the difference between a non-ethical and ethical Workplace Pension is apparent.
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:
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.
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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.
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:
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.
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.
GOOD TO KNOW 🤓
Making a pension “green” can cut carbon by 21x more than going veggie, giving up flying and switch energy providers.
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.
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.
Ethical Workplace Pensions use what is known as ESG (Environmental, Social, Governance) or SRI (Socially Responsible Investment) funds. But what are these?
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.
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 is 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 👇.
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.
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:
There are several factors you have to consider about how and where contributions are made. You can choose:
Before making any decisions about how and where workplace pensions are invested, it’s always best to speak with a specialist. They will be able to talk you through what’s best for your business.
Understanding the ins and outs of your Workplace Pension is hard enough without looking into whether it’s ethical or not. Which is why the team at Drewberry is are hand to help.
We live and breathe pensions, so if you need any help or have any questions don’t hesitate to get in touch. Give us as call on 02074425880 or email help@drewberry.co.uk.
Richard Noble
Senior Consultant, Employee Benefits
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:
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.
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 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.
The most vital thing to consider is the potential lack of diversification. Ethical funds can restrict the variety of the pension portfolio. This may lead to less diversity in the options available. And less diversity means higher risk.
Adam Gibbs
Workplace Pension Specialist
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.
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.
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Beware of “greenwashing”: a marketing tactic used to make a company appear more sustainable than it actually is.
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:
Questioning whether your current Workplace Pension scheme is ethical?
Most Workplace Pension schemes aren’t fully ethical by default. 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:
If you discover your current setup isn’t ethical, don’t worry. You can look to see if your provider offers more ethical funds, or you can look at switching your Workplace Pension to a new provider that does.
This can be a daunting task, which is why we’re are on hand to help. Call 02074425880 or email help@drewberry.co.uk to talk through your options.
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.
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 specialists can point you in the right direction and help find ethical pension funds for your team.
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.
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.
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.
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.
Employee benefits can be a headache. But our specialists do this day-in, day-out, offering first class service when you need it most. Here’s why you should talk to us:
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