An Ethical Pension is one where the investments inside your pension pot are carefully chosen to meet certain ethical criteria. This involves selecting companies to invest in that make a positive contribution and avoiding those that harm society or the environment.
Many pension providers have a default allocation which you are placed into and this is likely to be a fund containing large UK and Global companies. There may be an option to switch to a provided “ethical fund”, but this fund will be put together by the pension provider and their definition of “ethical” is unlikely to align exactly with yours. For example some leading ethical funds include oil and gas companies and the world’s second largest mining company.
If your provider does not offer an ethical choice or a limited unappealing choice then it is possible to switch to one of the many pension providers that do. Switching pension providers to access a greater choice of investments is one benefit of moving providers, but there are other potential benefits such as lower costs. As part of an ethical pension review process, a good pension adviser will advise you on the suitability of your current and other potential pension providers and work with you to decide if it’s beneficial to switch.
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Once you have control of your pension you can begin to explore the many different types of ethical, green, sustainable, blue, CSR types of investments and funds that are out there and decide which ones you would like to use your pension fund to support.
The situation is rather different if you have a Defined Benefit pension (sometimes called Final or Average salary pensions), please skip to the Defined Benefit section for more information.
Whether you have already built up considerable pension savings, or if you are at the start of your journey and have yet to decide on what pension to pay into, there is the possibility to use your pension funds to positively impact the world in the way you want.
The term “Ethical Pension” is an umbrella term for choosing the investments in your pension based on your values as well as returns. The term covers issues including, but not limited to, climate change, workers rights, arms, tobacco and gambling when selecting companies and other assets.
There are no set rules to say what category ethical funds fall into, but some of the most common types of ethical funds are:
At the core of your pensions are a set of investments, usually consisting of “funds”. Taking back control of these investments and redirecting them to where you want them to go is the main way in which you can make your pension ethical.
Funds offer an easy and convenient way to invest and are popular with both novice and experienced investors. They offer an easy way of diversifying across a number of different investments, by pooling together the money of lots of different investors, and a fund manager invests on their behalf. Funds can invest in various types of assets, such as shares, bonds, or property, depending on the investment objective of the fund. Funds are likely to be the best way to invest in a pension for most people.
The first step in choosing which funds is deciding what “ethical investing” means to you. Is it a avoid companies that you think are unethical, such as arms and tobacco? Or to invest in one that develops new green technology? Once you have a better idea then you can begin to filter the many ethical funds that are out there to find the right one for you.
It can be difficult enough to work out the best fund or mix of funds for our pension before you even start to add in additional criteria for your ethical views. Add to that the large number of different ways that each individual fund decides on what is ethical makes it potentially even more difficult. Careful research is needed to make sure that the right funds are chosen to make sure you are maximising your returns and pension growth as well as abiding by your ethical views.
The first step in making your pension ethical is to see where you currently are with your pension at the moment to best decide what the next steps are. Seeing how large your pot is, where it is currently invested, with which provider and what the rules are around switching – either out of the fund you are into a different one or switching away from your pension provider completely.
If you are just starting out and have yet to contribute to a pension then you do not need to go through this first step. Though it would be sensible to plan what you think your future pension contributions would be like.
If you have a workplace pension, your annual pension statement should tell you where your funds are invested. If you cannot locate your annual pension statement then you will need to get in touch with the pension administrators, your employer should be able to help you with this. If you have an IFA they will be able to ask these questions for you.
These days most workplace pension providers do have ethical investment funds available, although you are unlikely to be allocated this fund unless you specifically request it. As there is no set definition of what constitutes an ethical pension or investment it is important to check what the fund itself is invested in. There will be a fund factsheet either available as part of your pension documentation or a fund name that you can look up online.
If you have a private pension, such as a SIPP or Stakeholder private pension then it is up to you to choose your own investments.
This means you can choose from a wide variety of investment options deemed to be ethical or sustainable, but whose fund managers apply differing criteria when selecting stocks. Because there is no one definition of an ethical pension, the individual criteria need to be examined to work out whether they align with your values.
The National Employment Savings Trust (Nest) was set up by the government in 2010 as part of its “automatic enrolment” initiative, which was designed to get millions more people paying into a pension. You can invest in a Nest pension if you are employed or self-employed and it currently covers around a third of the UK workforce as many employers have chosen it to provide their workplace pensions.
Nest does have an ethical fund which it says is slightly higher risk than its standard fund. It invests in companies with positive records on human rights, fair labour, fair trade, and the environment. It avoids investing in tobacco, arms, and corrupt states, as well as companies with a bad human rights record, or that damage the environment.
The fund itself is controlled by independent trustees who make decisions on what to invest in. This means the decisions are out of the control of both yourself and your employer (if a workplace scheme). Although you can make the main choice: how much of your money do you want to invest in the Nest ethical fund.
The exception to these discussions on Ethical Pensions is if you have a Defined Benefit (DB) pension (sometimes called Final or Average salary pensions) as with these pensions there is no pot of money to invest and instead you have a promise from an employer to pay you a certain pension amount based on your salary.
There is still the possibility of using your pension saving, however. This would be by either saving into a different second pension (which allows you to build up a pot of investments) or transferring your Defined Benefit pension into one that gave you the ability to choose your investments yourself. However, there are many pitfalls with transferring a Defined Benefit pension and getting in touch with a regulated financial adviser is highly recommended to discuss your plans. If you have a DB pension over £30,000 then you will almost certainly have to contact an adviser before you are legally allowed to transfer. Please see our article on Final Salary pensions to see whether you have one or not.
Whilst there are many benefits of using your pension funds to support companies you believe in, there are some potential downsides that you should be aware of. Such as:
Many of us already make changes to our lives to try to make more of a positive impact on the world, and yet using our pension pots is rarely considered even though it could be one of the biggest impacts we can make. Most of us either have a pension pot already or are starting to save into one, so all that is needed is to divert the funds you already have towards companies that align with your values.
This could be a green pension that supports environmentally friendly companies or a more straightforward pension that simply excludes “sin” companies such as tobacco and arms.
If you would like to discuss the best way to start an ethical pension, how ethical and green they can be, what the costs and performance might be or anything else then please get in touch with an Independent Financial Adviser such as ourselves to discuss.
We enjoy talking about pensions and a belief that more people should be able to use their pensions to help the world, in whatever way they think is best. Please give us a ring for a chat and we would be more than happy to talk you through the options you have.