Both defined contribution (DC) scheme membership and assets are continuing to show steady growth despite the Coronavirus outbreak, according to the Pensions Policy Institute (PPI).
In the launch of its latest Future Book today (23 September), in conjunction with Columbia Threadneedle Investments, the institute said there has been a continuation of positive accumulation trends associated with auto-enrolment (AE).
However, this has been somewhat overshadowed by the Coronavirus outbreak, which the publishers of the book say has been "extremely complex to navigate and impacted the nest eggs of millions of pension savers in the UK".
The 2020 edition of the book also shows opt-out rates remain stable and contribution rates have increased, although persistence rates have fallen.
Additionally, trends in access to DC savings at retirement are continuing. While full withdrawal remains the most popular option for members, the most money continues to be spent on drawdown.
In 2019 there were 252,000 full cash lump sum withdrawals, while 116,000 took money as drawdown and 65,000 annuities were purchased.
The average cost of a full cash lump sum withdrawal was £15,000, annuities had an average cost of £66,000, while the average cost of drawdown was £79,000.
The proportion of non-advised drawdown sales increased between 2018 and 2019, while annuity advice levels remained low but stable, with 23% taking independent advice, 1% taking restricted advice, and the remaining 76% choosing not to take advice.
The book looks at uncovering long-term impacts of Covid-19 on companies, markets and economies and looks at why the consideration of ESG is central to this effort, especially due to the social issues the pandemic has propelled into the spotlight.
ESG a major focus
PPI senior policy manager Lauren Wilkinson revealed ESG is a major theme and "highlighted as an area of focus for DC investment".
The fourth chapter of the DC Future Book focuses on ESG and how trustees and advisers have responded to regulatory changes.
Wilkinson noted that "ESG risk factors are becoming an increasingly important consideration in pension schemes' investment decisions", but said: "There are still some schemes not engaging in a meaningful way."
Regulation over the past year has been encouraging trustees and providers to become more informed on ESG issues such as regulatory changes to schemes' statements of investment principles (SIP), and a recent government consultation on requiring the largest pension schemes to disclose climate risks.
She added: "Schemes who do not approach these issues effectively may not be adequately protecting members from long-term risks."
Integrating ESG considerations into investment strategies can be complex, Wilkinson explained, including the level of financial risk mitigation, delivery method, cost, governance, and scheme type and scale.
"A thorough understanding of the engagement and stewardship activities being undertaken on [schemes'] behalf by asset managers is necessary to comply with regulations and ensure that members are adequately protected from ESG risk factors," Wilkinson added.
Having an impact
Columbia Threadneedle Investments director of responsible investment portfolio management Simon Bond suggested trustees should be adopting principles for impact investing such as adopting a transitional mind-set, setting impactful objectives, appointing investment consultants and managers with impact integrity, using their voice to make change, and managing and reviewing impact.
He also revealed $65bn (£51bn) of social bonds have been issued this year, while green bond issuance has increased 19% compared to the same time last year.
Also, there has been a 530% increase in labelled social bonds versus the same time last year.
He said ESG is about "doing the thing right", while impact is "doing the right thing".
During a panel discussion on the DC Future Book, Wilkinson said during the Covid-19 crisis, "there has been less investment in default funds to alternative assets". She said despite expanding the asset classes asked about in this year's book, "we're still seeing low allocation to alternatives".
ShareAction campaign manager Lauren Peacock said: "Companies across the board are struggling at the moment" when it comes to the social aspect of ESG, "where some companies have laid off staff while some are looking to invest more in their work force rather than firing people".
She added: "On the ‘E' side, what Covid has shown is how systematic and systemic these risks are and how hard they are to plan for."
She also suggested how Covid-19 is similar to climate change in that due to the difficulty in preparing, "the effort should be on mitigating it", adding: "Looking at the long-term is important."
Bond said: "As the financial services industry we have a role to play in addressing challenges to society and the economy as well as providing a very social element - pensions themselves.
"We are facing an increasingly challenging world and need to plan long term. The important thing now with October looming is we need to encompass this. We can do more, we can contribute to solutions as a financial industry, we can be part of the answer and plan to respond to challenges better and have ambition in terms of dealing with challenges."
He added: "The ‘S' trend [of ESG] has been exacerbated during Covid, and is now front and centre."
With Covid-19 affecting economies, employment, and education, Bond said the ‘S' side of ESG "has probably been the forgotten part of ESG, but it is starting to come into focus and upfront and central and becoming as big as ‘E' and ‘G' now".
Peacock suggested: "Education is still a main barrier in reality. There's a lot schemes can do and a lot of what they don't do is down to education issues. There are plenty of conversations that they can have but that takes education and a good, solid understanding of what we need to go to a low-carbon economy."
Wilkinson agreed a key barrier to ESG investing is education. She said: "There is still some confusion around what ESG is among some trustees, particularly those of older smaller schemes." She suggested some are "focusing on the issue of climate change rather than the financial need to protect their members".
Department for Work and Pensions senior policy manager David Farrar urged: "All schemes can do something. We are starting to see trends but don't yet know where the fan of possible outcomes will end up.
"Many schemes are starting to embed consideration of climate change into their choice of fund managers and exploring innovative asset allocation. The key message is, even at the bottom end but across the board, the question for trustees now is ‘are you using all of the tools you have in your toolbox given your size and scale?'."
Farrar also suggested in the wake of Covid-19 that "the channel of communication from members to trustees will increase", noting "we all benefit from scrutiny".
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