Pension savings, especially workplace schemes and defined contribution plans, are often invested into the markets in a bid to build the largest pots possible for holders. How these pensions are invested can vary across the industry but over the coming years, a shifting dynamic could affect millions of retirees in one fell swoop.
Regardless of how anxious they may feel, savers will likely want to pay attention to their pensions in the coming years as their prospects could be upended.
Matt Smith, a director at Smith Hobbs Wealth Management, broke down what could be on the horizon for pensioners.
Mr Smith said: “Historically, green funds didn’t perform as well as their counterparts, largely due to the limited number of companies which would meet the criteria required by the fund. Fund Managers would traditionally have used negative screening methods to avoid companies which scored poorly on environmental, social and governance factors.
“As companies have grown increasingly aware of the consumer demand to buy from companies which are more ethical – extending to the products and the supply chain, inclusive of initiatives such as the ‘living wage’ being paid to workers and environmental factors for which more fund managers are signing up to the United Nations Principles for Responsible Investment.
“With a marked shift from shares such as British American Tobacco, which will have historically formed a large part of many portfolios, to perhaps Tesla or Beyond Meat, comes the potential for increased volatility as the sector is still in the early stages of growth with the sectors maturing towards the 2030, in sync with the UN Agenda for Sustainable Agenda and the ban on petrol and diesel cars.
“This is especially the case in funds such as the Impax Sustainable & Responsible Fund which invests in a relatively concentrated portfolio of 35-45 funds.
“Such funds may appeal to those individuals whose green values are aligned with the objectives of the pension fund or those for whom the benefits of taking a longer term view has become more prevalent when considering there has been a reduction in the number of pensions targeting a ‘lifestyle’ approach to risk (where the pension moves towards a more cautious approach nearer to the pension holder’s selected retirement age) as people live longer and taking into account that the age to be able to take a personal pension increases from aged 55, at present, to aged 57 from 6 April 2028.”
Similar sentiment was shared by Freddy Colquhoun, an Investment Director at JM Finn, who expanded on how low interest rates may also force changes.
Mr Colquhoun said: “Traditionally, as individuals approach retirement pension managers adjust the investments in their pension portfolios towards lower risk and higher income producing assets so as to provide them with income once they leave their employment.
“Government bonds and high yielding equities were the go-to investments for such investors. Today’s low interest rate environment, however, has changed everything, and with equities under much more scrutiny from an ESG perspective, pension managers are moving away from gilts, oil & gas, tobacco, banking, and mining sectors that used to form the ‘core’ of a pension portfolio.”
When examining the example of potentially moving pension pots out of industries like tobacco and into greener options such as electric cars, Alistair Hill, a Private Wealth Adviser at AHR Private Wealth, noted some difficulties could be on the horizon.
Mr Hill explained: “Similarly to the food, household goods and alcohol industries, tobacco has traditionally performed well in all economic circumstances with sales remaining consistent over time. Transitioning a substantial percentage of pension savings out of such a tested industry into new sustainable technologies could then be seen as a significant risk to investment performance.
“However, the UK Government’s 2030 net zero target for carbon emissions has clearly shifted focus towards the necessity of these new, more sustainable options, such as renewable energy businesses. Such government interventions leave no doubt that investors who expose themselves to this industry are expected to see those all-important returns.
“After the recent talks around taxation on high sugar and salt food products, it seems not too far a stretch to consider a potential similar increase in taxes on tobacco products aiming to deter investors away from the industry and onto green products. Increased fiscal, social and governmental pressure on the tobacco industry would also put heightened pressure on profits and, in turn, investors’ returns.”
However, while nothing can be guaranteed in the markets, Mr Hill concluded by examining how the changes could be beneficial over the long term: “Performance has long been seen as a trade-off for green investing. However, as society becomes increasingly conscious of the lasting effects of our lives on the environment, corporations are also being held accountable for the part they play, and this inevitably impacts investments and pension funds. Firms are now forced to adapt their processes to a green future, and many are finding increased efficiencies and profitability as a result.
“Additionally, there are now several examples of green portfolios bettering their full-market equivalents. Clearly, sustainability is now a key driver for consumers and will only continue to take prominence with future generations. If pension trustees embrace ESG as a core element of their investment strategies, their members are highly likely to thank them in the future, both in regard to returns on their retirement savings, and for the world they will retire in.”