17th Jan 2020 in Business

Matt Gray

Investment Manager at Doherty Pension & Investment Consultancy

What if your pension could help to make the world of the future a better place to retire in, and, at the same time, provide you with more money to spend in it?

There is a growing belief that we should all be doing our bit for society and the planet, be that how we shop, how we manage our energy usage and waste, or indeed by exercising our right to vote.

Well, just as these things can make a difference, the things you invest in do too. The way you manage your pension (as well as any other investments), can have a far-reaching personal impact on the planet.

Thanks to new rules most of us in the UK should now have a pension of some kind, or, at least, the option to have one. But there is still a widespread lack of understanding about what your pension actually is, where it’s invested, and the influence this can have.

Unless you work in the public sector (where the nature of your pension would be very different), you’ll most likely have what’s called a money purchase or defined contribution pension. In simple terms this is a pot of money, with several tax advantages, which you can access at from age 55 under current rules. The intention is that it will be used to fund your income in retirement.

Since you can pay into a pension throughout your working life, the money in the pot can be building up for 30 years or longer. It’s widely accepted and historically proven that over long periods of time like this, stock market investments outperform cash. For this reason, pension pots are, almost invariably, invested in the stock market as a default or automatic option (i.e. unless you instruct the provider otherwise).

For many of us our pension pot is the biggest stock market investment we’ll make in our lifetime. From our own point of view, it’s a very large sum of money, invested for a very long time. This is why the impact it can have is so great. Think of the stock market as a kind of ongoing election, where you vote for the types of private companies that you believe in and business practices you wish to see more of in the world.

When a pension is set up without any specific investment instruction most providers will invest in a default fund or ‘lifestyling’ strategy. These are generally widely diversified across most of the large companies that make up stock market indexes worldwide. If we take the portion of the fund that’s invested in UK shares as an example, it may be invested (wholly or partly) in the FTSE 100 – that’s a list of the largest 100 companies in the UK.

By following the FTSE 100 your money is being invested across this list of companies and apportioned to each based on their size. The constituents of the FTSE 100 however, may not embody the types of business you wish to promote, and become part owner of, for potentially the next 30 years. Using approximate figures, a FTSE 100 investment would mean your largest holding would be Shell which would combine with BP to employ about 15% of your investment in the exploration, extraction, distribution and promotion of oil & gas globally. Other top 10 holdings in the FTSE 100 include British American Tobacco at around 3.5% and mining company Rio Tinto at around 2.5% at the time of writing.

Becoming a part owner and backer of businesses such as these may not be an issue for everyone, but it appears there are a significant and growing number of us who would prefer that their vote is being cast in a different way. In a recent report carried out by investment house Franklin Templeton they found that, “The most telling figure was that 45 percent of people would be willing to make additional contributions if Responsible Investment was incorporated into their pension.”¹ .

This can include more than simply eschewing unsustainable and detrimental business practices; it’s also possible, and in many cases profitable, to actively use invested money to support and take ownership of exemplary businesses. These are the companies which are able to thrive in a sustainable way and which bring benefits to the planet and society as a whole. When this happens the ripple effects can be seen throughout the global economy as competition for capital leads to a kind of natural selection where only the responsible companies survive.

When investing this way, decisions are increasingly being based on the framework provided by the UN in their Sustainable Development Goals for 2030. The goals cover much more than environmental issues alone; poverty, education, equality, wellbeing and peace are all on the list. By way of example, some of the resulting themes include;

  • The Evolution of Agriculture – moving away from damaging chemicals and toward soil building, natural methods of increasing yields as well as incorporating AI technology to optimise farming practices.
  • Energy Transition – breaking our reliance on fossil fuel and moving toward clean sustainable energy. At company level SSE has committed to trebling its renewable energy output by 2030 and has recently announced the closure of its last remaining coal-fired power station.
  • Plastic Usage and Waste Management – When large companies take on the issue of plastic pollution the impact can be dramatic. As an example Unilever, which incorporates household brands such as Lynx, Dove, Vaseline, Persil, Domestos, Radox, Pot Noodle and more, is a global industry leader and has committed, by 2025, to cut their use of virgin plastic in half, to use 100% recyclable, reusable or compostable plastic and to collect and process more plastic than they sell.

Many of those who have taken the initiative to use their money in a more responsible way have been handsomely rewarded. It’s theorised that over the long term, companies which have been able to succeed whilst using responsible business practices are naturally better prepared for the future.They have advantages in terms of reduced regulatory pressures and cost savings as well as the increasing demand for, and positive sentiment towards, responsible business practices. Over time it’s reasoned that this should convert to superior performance compared to the stock market as a whole.

As an example, the responsible investment portfolios which we established just over two years ago, and use for client investments at our firm, have seen returns well above the average. For an investor with a balanced attitude to risk, the responsible portfolio would have made a gain of 17.2% over the period (01/11/2017 – 28/11/2019). Over the same time the average gain for a pension fund at the same risk level was 8.6% (ABI Pensions Mixed Investment 40-85% Shares).²

I must caveat this with a reminder that any stock market investment, particularly that within a pension, should be for the long term and two-year performance is a relatively short timeframe for comparison. Additionally, the prescribed warning: past performance is not a guide to the future, markets go down as well as up.

So how can you go about taking control of your pension in this way? Almost all pension providers will offer a choice of investment funds or strategies, and this may include responsible options, although choice with some can be limited. Pension pots are not married to the current provider; in many cases they can be transferred without penalty if you feel the current provider is not capable of meeting your objectives.

At a company level, this type of strategy can be offered across a workplace pension scheme and can be a powerful addition to any responsible business practices currently in place.

My firm and I are pleased to offer a responsible strategy for pensions and investments. Particularly one which can deliver such strong returns to our clients. We have recently seen a definite increase in demand from people in Belfast and across Northern Ireland. As a society we appear to be reaching a point where more of us appreciate just how responsible we are for shaping the future of our world and feeling an increasing sense of the urgency with which we need to act.

 

Past Performance ²

References:

1: The Power of Emotions Responsible Investment as a Motivator for Generation DC, Franklin Templeton, 2019.

2: Source: FE Analytics, 29/11/2019. Figures are quoted after the deduction of fund charges.

 

Doherty Pension & Investment Consultancy

114-116 Royal Avenue

Belfast BT1 1DL

07783127219

info@dohertypic.com

Doherty Pension & Investment Consultancy is authorised and regulated by the Financial Conduct Authority

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