Want to change the world? Use your pension.
This may seem a strange place to start.
Loads of people don’t even know their pension is invested in the stockmarket, let alone where. A pension is just some black box, sucking money out of payslips each month, which might possibly help pay the bills in some far distant future.
Yet right now more than £3 trillion is invested in UK pensions.
THREE TRILLION POUNDS!
That’s a mind-bending amount of money, and it could make a massive difference to more than just your retirement.
It could destroy lives and damage the planet, by funding companies that produce things like tobacco, weapons, gambling and fossil fuels.
Or it could make a positive difference to society and the environment, by investing in things like clean energy, green transport, healthcare and companies that support human rights.
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So consider whether you want your pension to reflect your values. Maybe you’ve switched to reusable shopping bags, carry a refillable water bottle and recycle religiously – but do your investments match up?
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The Church of England was hauled over the coals when it turned out to be investing in Wonga, the payday lender. Panorama also revealed that Comic Relief used to invest the fundraising in weapons, fags and booze.
Individuals may also face a clash between their principles and their investments. One example cited by the Make My Money Matter campaign really resonated with me – the oncologist who discovered that her pension was invested in tobacco companies, and therefore her retirement savings might well kill more people than the lives she saved while working.
If you want your pension to make a positive difference, here’s what you can do:
Check where your work pension is invested now
If you have a pension at work, dust off your log in details and check where it is invested.
Nowadays, most employers offer defined contribution pensions, and most of us just end up in the ‘default fund’, unless we actively choose a different option.
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If you’d like to know where your money is going, click around to find the name of the fund, and then the fund factsheet. That’s where you can see the investment objectives and lists of the top 10 holdings and biggest industry sectors.
Similarly, if you’re lucky enough to have a ‘defined benefit’ pension, often known as a final salary scheme, you should also be able to find a breakdown of the biggest investments.
Some workplace pensions have already moved towards more sustainable investing. Nest, for example, the workplace pension scheme set up by the Government which has more than 9 million members, confirmed that it became tobacco free earlier this year.
See if there’s an alternative that could make a difference
Many work pensions offer a choice of funds. The default fund everyone gets shoved into is unlikely to be world-changing.
However, you may also find the fund choices include a more ethical option, with environmental, sustainable and governance (ESG) aims.
Nest for example offers a Nest Ethical fund, designed for people with ‘specific concerns about the impact organisations have on the environment and society, in areas such as human rights and environmental damage’.
If you have a final salary scheme, you’re unlikely to have much choice – so move to the next step.
Tell your work
Maybe your workplace scheme doesn’t offer an ethical fund. Or maybe you’d like the default option or final salary scheme to be more sustainable.
If you care where your money is invested, do something about it.
Tell your employer. Contact HR. If your company has a specific mission and values, ask for the company pension scheme to share them.
Check your private pension
Stuck with choosing your own pension, whether you’re self-employed or want something on top of your work scheme?
The good news is a private pension gives you more control about how your money is invested, and whether it’s invested ethically.
Basically, you face a couple of choices: a pension where you can pick your own investments and manage your own money, and a pension where you get someone else to do it for you.
Using a pension from an investment platform with thousands of funds and shares means you can pick out more sustainable options, from specialist funds to trackers that follow ethical indices. However, it could also cost more and take more work to manage in future.
Alternatively, you could opt for an easy life and pick a pension company that does it for you. Many of the new breed of online money managers, often called ‘robo advisers’, offer ethical options, where you just pick the level of risk you are comfortable with, and they take care of the rest.
Elsewhere, online pension provider PensionBee offers plans (affiliate link) including a Future World plan, which invests in companies that pledge to move to an environmentally-friendly economy, and engages with companies to change their business practices and reduce their carbon footprint.
PensionBee has also just launched a brand-new Fossil Free Fuel plan (affiliate link) which goes even further, by excluding fossil fuel producers. It avoids investing in companies with proven or probable reserves in oil, gas or coal and tobacco companies, manufacturers of controversial weapons, nuclear weapons and persistent violators of the UN Global Compact.
Find out more about PensionBee’s new Fossil Free Fuel Plan here (affiliate link)
Move your money
Remember, if you don’t like the options available in your pension, you could always move your money.
It’s worth sticking with any pension scheme in your current job, to benefit from the free money added by your employer. Final salary schemes should usually be left well alone too.
But if you have old defined-contribution pensions hanging around, that don’t have valuable benefits like extra tax-fee cash, access at a younger age or guaranteed annuity rates, you could vote with your feet and move the money to a pension that offers ethical options.
What to watch out for
In the past, investors were concerned that investing ethically was more risky, more expensive and might result in lower returns.
It’s true that typically ethical and sustainable investments tend to have higher fees than ordinary funds.
The process of screening out certain companies, challenging management to raise ESG standards, or selecting companies that make a positive difference, can all push charges up. However, the gap has narrowed in recent years.
Over at PensionBee for example, the Future World plan costs 0.95% a year all in, almost twice as much as the 0.5% for the lowest cost Tracker plan. However, the new Fossil Free Fuel plan is more cost effective, charging just 0.75% a year.
You can also cut costs by saving more – if your pension pot is larger than £100,000, PensionBee halves the fee on savings above that amount.
You don’t necessarily need to sacrifice good returns to support good causes.
In fact, research studies have repeatedly shown ethical investments have done rather well recently. For example, Good With Money found that sustainable funds have outperformed the sector average over the last five years, and throughout the coronavirus crisis.
Obviously, performance will depend on the specific investments you choose, and when investing there’s always a risk that you might get back less than you put in. But when stashing cash for retirement many years ahead, your pension contributions do have plenty of time to bounce back.
Shades of green
Ethical and sustainable investing comes in many shades of green.
At one end, some funds put pressure on companies to behave more ethically and sustainably. Others refuse to invest in companies that do harm, knocking out investments that don’t pass their tests. At the other extreme, some funds choose companies that actively do good, such as generating clean energy or making products from recycled materials.
Always look behind any green/eco/ethical/environmentally friendly label, to see if the investment’s approach matches yours.
Where to find out more
If you’d like to find out more about sustainable investing, good places to start include the Good With Money website, Boring Money’s guide to sustainable and ESG investing and (if you really want to dive deep) Fund Eco Market’s fund selector tool.
Now – over to you. Ever checked whether your pension matches your principles? Take control of your pension, and make your money matter!
This is a collaborative post with PensionBee
PensionBee is authorised and regulated by the Financial Conduct Authority. With pensions, your capital is at risk. The value of your pension with PensionBee can go down as well as up and you may get back less than you started with.