Joanna Sharples: How today’s pension savings can shape tomorrow’s world

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Pension saving might be for the long term, but the way schemes invest employees’ money has a day-to-day effect on the world around us. Campaigns such as Make My Money Matter have encouraged members to look inside the ‘locked box’ of their pension investments, and start to ask questions about how their savings are affecting environmental issues such as climate change.

We are seeing this trend first-hand. The Aon MasterTrust, has seen nearly a 50 per cent increase in the number of members exploring ESG (environmental, social and governance) investment options since the beginning of 2020.

But it is not enough to think about ESG as a self-select ‘fringe option’ in a pension scheme. Addressing issues such as climate change need to be part of default fund investing, so that employees who do not want to manage their own fund choices also know their money is being invested responsibly.

These factors, combined with Aon’s core belief in the importance of the potential risk and return benefits of responsible investing, have contributed to our decision to use a low-carbon investment approach for all our defined contribution (DC) pension default investment funds. That includes our solutions for in-house DC schemes, as well as our master trust and Group Personal Pension (GPP) offerings.

To achieve that, we’ve introduced two new funds. In October 2020, we introduced the Aon Factor Service. This is a passive equity fund with a low-carbon overlay, which means the range of companies the fund invests in is based around an index, but the selection is ‘tilted’ in favour of businesses with lower carbon emissions, and away from businesses that are more carbon intensive.

Working with our fund managers and index provider, we want to maintain the right balance between excluding ineligible companies completely and retaining some level of investment in businesses where there is a demonstrable commitment to change. Additionally, the fund eliminates stocks, such as tobacco companies and controversial weapons manufacturers, that breach the UN Global Compact, an international agreement which encourages sustainable, socially responsible policies in business.

Carbon emissions for The Aon Factor Service are around 60 per cent less than for a traditional market capitalisation-based fund, offering a significant reduction in its carbon footprint. Since October 2020, the fund has made 25 per cent of our DC default investment strategy for the early years of a member’s pension savings (up until around 15 years before retirement) and around 55 per cent of our active default strategy. Crucially, we have achieved this with no reduction in expected returns for members.

We have also created a further responsible investment option, the Aon Managed Global Impact Fund. This is available as part of our self-select fund range and in January 2021 we went a step further and introduced a 10 per cent allocation within our active default strategy for The Aon MasterTrust, and Group Personal Pension.

The Aon Managed Global Impact Fund is an actively managed equity fund – so our investment managers choose the companies they invest in, rather than following an index. Those selections are based both on financial performance and whether the company is making a positive impact on society and/or the environment.

For example, we invest in companies involved with electric vehicle battery recycling, in water treatment in developing countries, in bringing financial services to underserved communities, and in plant-based alternatives to meat.

As well as generating a positive impact, the fund aims to deliver healthy long-term returns to savers. Using simulated figures, based on actual returns from our three underlying managers and our initial manager allocations, over a three-year period to 31 December 2020 the Aon Managed Global Impact Fund would have generated a return of 20.7 per cent per annum1 which was 10.5 per cent per annum higher than the MSCI World-ND index, which we use as our benchmark. Crucially, investing in a sustainable way does not mean investors need to accept lower returns.

By focusing on responsible investment in all our DC default investment strategies, we are offering members a better balance between risk and reward as well as the chance to understand how their pension can contribute directly to a more sustainable future for everyone.

As a result, our members have a transparent, positive story about how their money is invested, and can feel comfortable with investing their pension contributions. It also gives employers some great opportunities to communicate with their employees about why saving for a pension is relevant to employees’ lives today, as well as a vital part of their financial future.