“So, Mr Chief Executive, we really like what your company is doing in relation to environmental improvements and we’re pleased to see you’re working effectively towards your net zero climate change pledge. It’s also encouraging to see your positive policies on diversity across all aspects of your business. But what are you doing to make your pension fund more sustainable?”

We’ve maybe not yet got to this type of conversation in boardrooms across the UK, but it may be only a matter of time until we do. Many organisations are working hard within their own businesses to become more responsible, not just because they feel they have to but because they believe that it’s the right thing to do from a financial perspective. But at the same time, many of the pension schemes of these companies are doing little or nothing to reflect the company’s own corporate social responsibility (CSR) policies in their DC pension scheme investments. This, we believe, will need to change over the coming years.

Why now?

There’s been an increased interest from government and regulators in where pension scheme money is invested, as well as a drive towards greater disclosure. The new requirements in relation to TCFD (the Taskforce on Climate Related Financial Disclosures) will bring this even more clearly into focus. Trustees now have to set out in their Statement of Investment Principles how they deal with environmental, social and governance issues (and climate change specifically) and Implementation Statements will need to provide details on how the trustees and their managers are putting their policies into practice. Independent Governance Committees (IGC) of contract-based arrangements have a raft of new responsibilities to consider the providers’ policies in relation to ESG. And we’ve already completed the reviews for both IGCs and master trust trustees to benchmark the responsible investment credentials of their providers – with some interesting results.

In reality, at this point in time, the chief executives of most UK companies will have little or no idea of where their company pension scheme’s default investment strategy is invested. Most likely, they will have opted out of the scheme due to annual or lifetime allowance issues. But with all aspects of a company’s business coming under increasing scrutiny (and in some cases contracts being won or lost partly on a company’s ESG practices), the time is now right for them to take a greater interest.

What does this look like in practice?

We’ve found that many of our clients have already started to consider the way the pension scheme is invested and how this dovetails with the company’s wider policies on corporate social responsibility. Several clients have invited their company’s CSR managers to present to the trustees or governance committees to outline their current policies and future plans. This has led to informed and inclusive discussions about how the investments of the pension scheme shape up against the company’s policies and plans.

For some clients, we’ve already started to see a genuine desire to better reflect the values and plans of the company within the pension scheme. We’ve been able to explore the funds and strategies that are currently available to DC pension schemes which might bring our clients and their organisations’ policies closer together. Some have directly changed the investment strategies of their default arrangements off the back of this. Some have wanted to go even further and to work with their fund managers to explore whether more bespoke strategies could be built to enable that better alignment to take place.

For those within single trust schemes, this tailoring of default strategy can be achieved relatively easily. It’s harder to achieve this through the “off the shelf” default strategies of master trusts or contract-based arrangements but for those companies with the appetite to do this, tailored strategies can be built with many of the leading master trusts and GPP providers.

To sum up...

We’re still in the early stages of developments here, but we fully expect this to become a greater area of focus, certainly for larger company schemes going forward. As many of you will know, we’ve made changes to our own staff pension scheme here at Hymans Robertson to help us align more closely with the direction of travel of the firm as a whole. We see this as a journey rather than a final position, where we can develop our strategy over time to reflect both the changing market background and the products that are available.

If you’re not doing so already, we challenge you to assess how well your own pension scheme aligns with the CSR policies and plans of your sponsor – and to be bold enough to make changes where you believe this is warranted.

This article also featured in PMI's Pensions Aspects magazine.