Default Investment strategies have been under the microscope for a while, but the focus is changing. In addition to taking account of pension freedoms, charges and risk, we may now be looking at how these investments have an impact on the environment and their approach to social responsibility. We have already seen that NEST ‘tilt’ their investments towards low carbon companies, and the ESG ratings could soon be one of the measures that trustees and governance committees review on a regular basis.
We are unlikely to see a wholesale removal of investments with poor ESG ratings as in many cases they are inextricably wound into the defaults and would require member consent to change. The performance of default funds has also been dependent on some of these lower ESG rated markets. However, fund managers may be under more pressure to choose funds within their existing remit that have stronger ESG ratings.
A ‘tilting’ of the investments towards these funds could be seen as tinkering around the edges but would also control the impact on the investment markets and performance experienced. Over time, the change in stance is also seen as an opportunity to put pressure on those companies and regions that cannot provide strong enough ESG ratings as they would potentially find that raising money from pension funds is restricted.
Time will tell if this has an impact on default fund performance and/or the behaviour of companies currently not measuring up, but most people want a sustainable and socially responsible world for their future and that of their children, so momentum could grow. One thing is certain, governance committees and trustees will require more help to measure and analyse their default fund options, and advisers will be critical in delivering this through the governance process.
There will also be pressure for trustees and governance committees to report back to members on how their default funds measure up and what action is being taken to improve their position.