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Pension funds have a specific mandate to generate long-term returns, as securely as possible.
This means they often invest in large, well-established companies that issue fairly reliable dividends.
Historically, this has meant a lot of our pension money has ended up invested in stocks such as oil and tobacco companies, inadvertently supporting industries that are, on balance, harmful to society, simply because these companies meet the risk and return requirements of pension funds.
However, in recent years, as industries such as renewable energy and resource efficiency have matured, opportunities for pension fund managers to invest in companies that are beneficial to society, while still meeting their risk and return goals, have grown.
In fact, research suggests that investing according to guidelines such as the UN Principles of Responsible Investing, or Environmental Social Governance criteria actually boosts returns.
As the authors of the recent Barclays Equity Gilt Study put it: “Not only is it no longer assumed that “doing the right thing” will place a drag on portfolio returns; rather, it is now seen as prudent to avoid investing in companies that have a detrimental impact on the world, because their business practices may not be allowed to remain unchanged.”
Thankfully, a number of pension providers have cottoned on to the benefits of a more responsible investment strategy and now offer ethical fund options that in many cases, outperform the risk-based options.
If you are in any doubt about the companies that your pension fund is invested in, be sure to ask. Most providers will be able to issue you with a full list of holdings and possibly an indication of how their fund is rated for sustainability (Morningstar, the fund ratings service, now also rates funds for sustainability). Plus, it helps to show there is demand for this sort of information, as many platforms and advisers are still not convinced that regular investors care that much about what their money is invested in.
If you do, here are four options, from website Good With Money:
The NEST ethical fund
NEST, the National Employment Savings Trust was set up by the Government as part of its commitment towards auto-enrolment. Its 0.3 per cent annual management charge is one of the lowest on the market, though there is a 1.8 per cent charge for contributions. It is also free to transfer existing pots in.
The sustainability fund, which NEST says is slightly higher risk than its standard fund invests in companies with positive records on: human rights, fair labour practices, fair trade policies, especially with developing countries and the environment.
It avoids investing in tobacco, arms and corrupt states including those with a bad human rights records, as well as companies that damage the environment. The fund has grown 11.7 per cent a year since launch, making it a better performer than NEST’s other funds (except for its Sharia offering). More here.
Aviva self-select pension
Pensions giant Aviva has a number of ethical funds that can go into a pension.
Some of the best performers include Aberdeen Fund Managers Ethical World Equity, although since this holds a large proportion of EOG, a shale oil producer, it might not fit everyone’s ‘ethical’ criteria. Likewise Axa’s Ethical Distribution fund has holdings in drinks company Diageo and several large banks. Kames Ethical Cautious Managed, which has Prudential as its largest holding, is another option. More here.
Standard Life Ethical Pension Fund
Standard Life has a number of ethical pension funds. Its ethical pension fund has outperformed its benchmark (the ABI (Pension) Mixed Investment 40-85 per cent Shares Sector ) in four of the last five years, returning 23.4 per cent in the year to end June 2017, and 75 per cent over five years. Large holdings include housebuilder Bellway, fashion retailer Boohoo.com and posh tonic water business Fever Tree. The company also has corporate bond fund and European ethical fund options and an actively managed UK social bond fund. More here.
Legal & General
Pension provider L&G’s ethical fund is available within a pension, and aims to track the return of the FTSE 350 Index (after adjustment for charges and tax), not including companies who don’t comply with a range of ethical and environmental guidelines. It has returned 72.6 per cent over five years to June 17, and its main investments are in financial services companies. The company filters out companies involved in practices such as intensive farming, gambling, adult entertainment, weapon manufacturing and selling tobacco. More here.
If you are still building up your pension pot, 100% will be protected by FSCS if it's directly managed under a life insurance contract. This would include personal pensions and stakeholder pensions, but not defined-benefit workplace pension schemes, which may be instead covered by the Pension Protection Fund.
Find out more about FSCS compensation limits for pensions here.