How to set up and run a small business

Leaderboard – Run – Legal

You are here: Home » Run a Business » Legal » Two big reasons to choose a workplace pension scheme that invests responsibly

Two big reasons to choose a workplace pension scheme that invests responsibly

May 10, 2017

With auto enrolment now well into its fifth year, you’re likely to be familiar with the workplace pension reforms and what they mean for you and your workers.

What some employers may not have thought much about is that, as a result of auto enrolment, millions of workers are getting a stake in companies around the world.

Choosing a pension scheme that invests your employee’s pensions suitably is therefore something every business owner will want to do.

Pension schemes invest their members’ money in a variety of assets, including company shares, to help their pension pots grow. As a small business owner, you’ll know how important capital investment can be in helping you build and grow your company.

Why should your workplace pension invest responsibly?

You also know there are no shortcuts in business. If a business breaks the law, or treats its workers badly, the business will ultimately take a hit, either through fines, losing good people or customers. These things all impact the bottom line.

As investors, pension schemes want to avoid those losses too, so it’s their role to help the businesses they invest in be the best they can be and promote good governance.

Investing responsibly means taking these aspects, known as environmental, social and governance (ESG) factors, into account when making investment decisions.

There’s increasing awareness among schemes about the importance and benefits of responsible investment. This is undoubtedly good news, but how exactly does responsible investment affect your workers and why should it be a key factor when selecting a pension scheme?

There are two big reasons to choose a provider that invests responsibly;

Reason 1: It helps to protect pension pots and make them more profitable

Members of pension schemes could be saving for ten, twenty, thirty years or more. This means that the investment factors that could impact their pot over the long term need to be considered carefully.

ESG factors such as climate change, slavery and child labour within supply chains, or bribery and corruption are all going to affect returns in the long run.

By assessing the risks, schemes can ensure the companies and markets they invest in are sustainable and pressure them to change their ways if they’re not. This helps to both boost and protect members’ pots.

After all, it’s widely acknowledged that well-run organisations with sound environmental and social practices have a better chance of sustaining long-term success and profitability.

Take the banking sector for example. Who can forget the financial crisis in 2008 when share prices of UK banks plummeted?

The governance of these organisations, namely their poor conduct, was a major part of the problem. This included the mis-selling of products, market rigging and not having proper controls in place to prevent laundering criminal funds.

It resulted in banks paying fines and damages of around £200 billion, money that would have been better spent re-investing to create more growth and better outcomes for everyone.

Reason 2: It’s a force for good, benefiting society and the environment

Responsible investing also has a broader benefit for the world we live in. That’s because schemes can use the ownership rights associated with the investments they make as force for positive change.

Through a combination of engagement and voting on issues at annual general meetings, schemes can have a powerful influence over companies and standard setters.

This means taking an active role in supporting companies with the management of ESG risks and opportunities. It also means using influence to improve the practices of the companies.

This could be, for example, by a scheme telling companies that if they make the right type of change they’ll increase the amount it invests. That sends a strong signal to businesses as well as an incentive.

A common myth is that responsible investment is all about selling out of companies, or completely screening out those that at one point in time have less-than sustainable practices. But that’s just not true.

By no longer investing in a company, the scheme would lose its influence and voice. And, it would mean that the problem could get passed along elsewhere and simply continue in different hands.

How can I tell if a scheme is a responsible investor?

To find out if the scheme is a responsible investor, have a look on their website for a responsible investment report.

You could also visit the ShareAction website. They’re a charity that campaigns for responsible investment and assesses pension schemes based on their approach.

More Auto Enrolment resources

Thanks to Paul Budgen, Director of Business Development of NEST for contributing this article. If you need further help with AE, or you just want to find out more about NEST’s scheme, there’s lots of information on the NEST website.

If your business has an AE staging date in 2017, our Step by Step Guide to Auto Enrolment in 2017 will tell you exactly what you need to do.

You’ll also find the answers to questions small employers frequently ask about workplace pensions in these;