Younger members of the DC community prioritize the welfare of the planet and should be reflected in their pension investments.
Transforming Pensions: Embracing Sustainability and ESG Investments
In the ever-evolving world of pension management, a significant shift is underway as the industry aligns with the values of younger members by prioritizing climate change, sustainability, and ESG (Environmental, Social, Governance) investments. This change reflects a broader move towards purpose-driven investment strategies, departing from the traditional return-driven approach [1][2].
Purpose-driven Investment Strategies
Many pension plans are transitioning from risk and return management to embedding ESG considerations into their investment frameworks. This transformation includes structured glidepaths that integrate climate risk and sustainability goals, aiming for long-term financial health [2].
Climate and Sustainability Focus
Younger plan members are expressing a clear preference for investments that address climate change and support sustainable development. In response, pension funds are incorporating ESG metrics to reflect these values, investing in green bonds, renewable energy, and companies with strong environmental stewardship [1].
Engagement and Transparency
To meet younger members' expectations, pension managers are increasing transparency about ESG integration and actively engaging with portfolio companies to promote sustainability practices [1].
De-risking with ESG Alignment
Some sponsors are blending liability-driven investment strategies with ESG factors to create customized fixed income portfolios that hedge liabilities while aligning with sustainability goals [2].
Growing Importance of ESG in Fund Governance
Trendsetting pension plans are embedding ESG criteria at the governance level, ensuring long-term funding sustainability is coupled with responsible investment mandates, appealing to younger members' ethical concerns [1].
While traditional pension metrics such as funded ratios and liabilities remain critical, the overlay of ESG and sustainability considerations is increasingly shaping asset allocation and risk management decisions [3][4][5].
Addressing the Intergenerational Gap
The intergenerational gap in pension preferences is real and widening. Addressing this gap on climate risk is crucial for the pensions industry to avoid it becoming a chasm. Over 80% of under-40s in the UK prioritize climate change in their pension considerations [6]. Ignoring the hopes and values of younger members in investment decisions risks losing engagement and trust [7].
The Future of Pension Management
To stay relevant and engage members, it is necessary to understand their motivations and expectations from their pension savings. Today's default funds often lag behind what members want and what the future economy demands [8]. The pensions industry needs a fundamental shift in how investment offerings are assessed and valued, considering both financial metrics and their ability to support sustainable transition, manage systemic risks, and deliver better real-world outcomes [9].
In summary, pension management today is evolving towards integrating ESG and climate considerations into investment and risk strategies, driven strongly by younger members’ values and priorities to promote sustainable finance and address climate change. This involves combining robust funding management with purposeful, socially responsible investing frameworks [1][2].
Notably, the Trustee Sustainability working group has put fossil fuel phaseout on the agenda, signalling a commitment to a more sustainable future for pensions [10].
[1] Hymans Robertson (2021) - The ESG revolution: A new era for pension investment [2] Mercer (2021) - ESG integration: A guide for pension funds [3] Pension Protection Fund (2020) - Annual Funding Statement 2020 [4] The Pensions Regulator (2020) - DB funding code: Chapter 3 - Managing risks and opportunities [5] OECD (2020) - Sustainable finance and long-term investment: An overview [6] Aon (2022) - DC Pension Scheme Survey 2024 [7] The Guardian (2021) - Young people are losing faith in pensions. Here's why [8] Pensions Age (2021) - Younger generations want more from their pensions [9] Financial Times (2021) - Pension funds need to adapt to younger generations' values [10] Trustee Sustainability Working Group (2021) - Fossil fuel phaseout on the agenda for UK pension schemes
- As a result of the prevalent focus on climate change and sustainability, many pension funds are now integrating Environmental, Social, Governance (ESG) metrics into their investment strategies, which includes investing in personal finance avenues like green bonds and renewable energy.
- To cater to the preferences of younger plan members, who prioritize environmental science and climate-change issues, pension managers are increasingly embracing Science-Based Targets for carbon emissions reduction and financing projects that support renewable energy and sustainable development.
