The latest from our Scottish consultancy team, based in The Capital Building on Edinburgh's St Andrew Square
If you are reading this, the chances are you are involved in running or governing a pension scheme (there may have been a “short straw” involved).
If so, you will appreciate that the contributions you, your colleagues and your employer make on a regular basis are invested in a range of assets, the largest component likely being equities, or stocks & shares.
You maybe won’t appreciate that that puts you in the minority…a recent survey suggested only 31%* realise their pension fund was being invested!
Warren Buffett, one of the world’s most successful investors, and famed for his simple investment advice once said, "Never invest in a business you cannot understand".
The idea then of investing in anything when you don’t even know you’re investing…probably not a point Mr Buffett has ever seen fit to comment on.
So how has this happened?
Automatic Enrolment has been hugely successful in increasing the levels of pension scheme membership and pension savings. However, the whole concept was essentially based around putting employees in a pension and hoping they would go along with it.
Add in the requirement for employers to nominate a default investment strategy - unquestionably appropriate to simplify the joining process - and we have huge proportion of new pension savers (90-95%**) using those defaults and evidently in many cases never really understanding where their money is going.
Now, nine years after the first new members were auto-enrolled, there are some really good reasons to take steps to resolve this.
Clear action on climate change and social responsibility are now rightly key factors many of us consider when we choose where to do business, where to shop, eat, work…invest?
How do WE fix it?
Perhaps one of the reasons some pension members haven’t looked too closely at their pension investments is because they have done well. Automatic enrolment kicked off reasonably early in what turned out to be the longest equity “bull market”, or period of rising values, in history. Default fund investment returns were positive, regularly exceeding expectations, and even those that “underperformed” had long periods of strong growth. The technical term is “if it ain’t broke…”.
Addressing this issue will take a team effort, and progress on two fronts.
Step one, is to review your default strategy to determine whether it’s suitably tilted towards those important environmental, social and governance (ESG) factors.
Yes, it’s the right thing to do, but also there is clear evidence that it leads to sound investments, with the opportunity for improved returns, which would ultimately lead to better outcomes for your pension scheme members.
Step two, engage and educate your members.
I have just conducted a short survey with the other adults in my household. It’s a small sample size (my wife) but the findings were interesting.
Thankfully she knew that her pension was invested (that could have been embarrassing).
However, she did not know how it was invested or in which businesses other than just being in the scheme default.
A quick check of a couple of fund factsheets told me that her top holding is a multinational oil & gas company. She admitted that it didn’t really surprise her, but that if she was making an active choice, she might choose something else. This information is available via the provider, but perhaps not laid out or highlighted in an appealing way, so no active decision was ever really likely to be made.
Interestingly enough, I happen to know through my own research on behalf of clients, that this particular oil & gas firm, in response to activist investors including some of the large UK pension providers, have set hugely ambitious ESG based targets. Again, that information is readily available (I read about it in an industry newsletter) and would have an impact on the view of some, but is also not always delivered in a way that grabs the attention it needs.
Information needs to be shared in the right way, at the right time and to the right audience. That has to be the goal, and thanks to the communication tools now available, it has never been easier to put an effective communication strategy in place.
Even in the last few months, our industry has made massive strides in the use of technology to help pension scheme members access the information that they need and want in this area – even as far as the option to give their opinion on how their investment manager should vote in any shareholder resolutions!
These kind of developments, we think, are really exciting and will serve as the extra motivation needed for many to get involved with their pension, providing an opportunity to put their money to good use now, as well as later in retirement.
If you haven’t reviewed your default investment in the last year or two, you may want to think about it now and we can help, and if you are interested in hearing more about the latest and greatest ways to engage with and educate your colleagues, we would be delighted to show you what’s now available. Please get in touch with us: firstname.lastname@example.org