By 2018, all UK businesses will by law need to automatically enrol employees aged over 22 and earning more than £10,000 into a pension scheme. These pension pots could reach an estimated total of around £480bn by 2030. For businesses striving for sustainability, this presents a new opportunity to contribute to the ‘greening’ of global capitalism.
Employers will not only be contributing a good chunk of that sum themselves – they have to put in at least 3% (with employees contributing 4% and tax relief comprising 1%) of employees’ qualifying earnings between £5,772 and £41,865 – but how they approach this legal duty could also have a big impact on what happens to that money and where it is invested.
Pension funds are among the biggest institutional investors in the country. That means they control the flow of billions of pounds which is invested in companies, property and lent to governments here and around the world.
The choice over which pension scheme to enrol workers into and how to communicate with them about it falls to employers, making them significant brokers in this multibillion pound market.
Recent NEST research found that nearly three quarters of small and micro-employers, who will start enrolling staff from next year, say the investment approach of a pension provider will be important when choosing a scheme to use.
This is no doubt because they want the best outcomes for workers, but could also be because they understand what motivates them. A strong sense of organisational culture and values can, according to a number of studies, help drive business success and staff satisfaction. So finding a pension provider with investment values that match those of the organisation may have a number of benefits.
A recent survey by the National Association of Pension Funds (NAPF) found that when pension savers understand that their money is invested in the wider economy, they want it invested in a way that supports companies’ long-term futures, upholds worker rights and supports human rights and environmental sustainability. Choosing a pension scheme with a clear focus on the relevance of good corporate governance, how companies manage their relationship within the society they operate and their impact on the environment not only makes sound investment sense but is also likely to chime well with their workforce.
In addition, having a fund choice that is specifically designed to meet certain ethical concerns is likely to be important to many workers too. NEST research into members’ attitudes towards pension saving suggests there is a clear desire for many to be able to invest according to ethical or religious beliefs.
Our research also found that people want a degree of choice over what happens to their money. But too much choice is debilitating and disempowering, leaving savers simply overwhelmed and less likely to make any choices at all. Limited but targeted options are better at encouraging choice.
Clear communication can also help people to make choices. Making investments tangible to members is one way that may help bridge the gap in people’s understanding of what happens to their money when it’s in a pension. For NEST’s Ethical Fund, this means making it clear to members that companies that abuse human rights or pollute the environment will be avoided. Instead the money will be channelled to companies that are trying to improve energy efficiency, create better social environments or make progress on global health issues, for example.
And while evidence that money is a strong motivating factor for staff is scant, behavioural science suggests that ‘pro-social’ spending does make people happy. Knowing that your money is going towards helping other people has a positive impact on wellbeing and happiness.
But ultimately, choosing a scheme that has a strong focus on responsible investment will ensure that the hard-earned money employers and employees put in, works with the grain of long term sustainability.
Paul Todd is assistant director of investment at NEST. NEST has been established as part of the government’s workplace pension reforms, known as automatic enrolment. It is run by an independent trustee on a not-for-profit basis with a duty to act in the interests of its members.
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