BW calls for compulsory shift to ESG defaults for DC plans

Consultant says transition to sustainable defaults would have ‘tremendous impact’

Jonathan Stapleton
clock • 2 min read
Latham - The onus shouldn’t fall on individuals
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Latham - The onus shouldn’t fall on individuals

Barnett Waddingham is calling for a radical reform of the UK pensions system – transitioning all workplace defined contribution default funds to sustainable alternatives on an opt-out basis in a bid to overcome member inertia.

The consultant said its research had found that, while most savers want their pension to be invested responsibly, very few of the 18 million people currently auto-enrolled into workplace schemes have moved their investments to sustainable funds.

It said that, when asked whether ESG funds should be the default option for workplace pensions, one in five savers (20%) said yes regardless of return, and a further 26% said yes so long as the return is the same as a non-ESG fund. It said some 45% of people with a workplace pension were indifferent, leaving a mere 9% who believed the default fund should not be ESG-focussed.

Despite this, the research found some 80% of people with a workplace pension have never made any changes to the funds they invest in, and a further 11% have only made a change once.

It said older members aged 55 and above are particularly apt to stick to their original fund choices (91%). Those aged 18 to 34 are more likely to review selections but still only one third (34%) have ever made changes to their investments.  Crucially, women are far more likely to have stayed in their default fund than men, at 85% compared to 75%.

Barnett Waddingham said that £8bn is currently invested in workplace pensions and warned that unless consumers engage more regularly with their pensions or the government takes radical action to boost uptake of ESG funds, this money won't be invested responsibly.

Barnett Waddingham policy and strategy lead Amanda Latham said: "The UK is battling a bad case of inertia, with UK savers displaying a lack of confidence, ability, or knowledge around changing their workplace pension investments. But there's no lack of appetite, and it's the responsibility of the pensions industry to facilitate that appetite.

"The onus shouldn't fall on individuals. In a system designed around inertia, we need to see policymakers and employers offering better default strategies rather than relying on pension holders to come up with them themselves."

Latham added: "The UK's organ donation system is one of the most effective examples of opt-out policy in the world, but it's a criminally underused tool when we're looking to enact real change while protecting agency.

"By transitioning default workplace pensions to ESG funds, we'd see a tremendous impact on sustainable investing. As with the organ donation example, we'd likely also see a huge increase in conversation around pensions, prompting people to engage with their retirement savings and make their money matter. If the UK is going to be a leader in a greener world, there's no time to waste - we need to follow the money and do what it takes to make change happen."

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