The report, Reclaiming Ownership, covers nine pension providers with £1.9trillion in assets under management. This is a sizeable proportion of the £3trillion life insurance companies and pension funds market in the UK.
The providers’ default auto-enrolment funds were ranked on transparency, governance and Responsible Investment performance. Out of a possible total score of 80, the providers rank as follows: Aviva (39); Standard Life (contract-based scheme) (37); Standard Life (master-trust) (36); Aegon (32); NEST (27); Legal & General (master-trust) (23); Legal & General (contract-based schemes) (23); NOW: Pensions (17); Royal London (16); Scottish Widows (13); The People’s Pension.
Under automatic enrolment, employers must enrol staff earning more than £10,000 a year into a pension scheme. In 2016 alone, half a million small employers must select a provider for their staff. It is estimated that by 2018, the number of UK pension savers in an auto-enrolment scheme will have grown by 9 million.
The providers surveyed for this research are set to dominate the UK’s private pensions market for decades to come. The ShareAction survey found that:
- Not a single auto-enrolment pension provider in the group has chosen to put a pension saver with assets in the scheme on its board. Historically UK pension schemes have had at least one third of their boards made up of Member Nominated Trustees whose own retirement savings are in the scheme concerned. In the context of significant problems over the last decade with conflicts of interest, poor service and value for money in the contract-based side of the UK’s pensions market the lack of pension savers with ‘skin in the game’ on the boards of the UK’s major auto-enrolment providers is troubling.
- A number of these giant providers are delegating virtually all responsibility for the prudent stewardship of pension savings to asset managers, rather than developing and communicating their own investment policies to protect members’ savings. Most of the schemes do not disclose investment policies to customers on their customer-facing websites. This makes it unclear how, or indeed if, these pension providers scrutinise their asset managers and hold them to account on behalf of savers.
- The problem of weak oversight is particularly severe when the asset managers are third parties and not part of the same firm as the provider. Only five of the providers require evidence of stewardship capabilities when selecting external asset managers. Only two of the providers surveyed, NEST and Aviva, have issued statements of compliance with the UK Stewardship Code as asset owners.
- NEST, the government-backed auto-enrolment provider, got the best score on governance. NEST is to be commended for having a section on Responsible Investment on its customer facing website. NEST and NOW: Pensions both have a member panel with more formal roles in the governance structure, although neither has a member on its board. Aegon, Standard Life and Aviva have established customer hubs or customer research communities. While the research finds some emerging best practice, overall the report concludes that communications and accountability to members “still fall way short of what is needed to overcome the public’s widespread lack of trust and understanding of the pension sector.”
- There is a wide variation on how the schemes are integrating social, environmental and governance risks into their investment strategies. Under auto-enrolment, savers bear all the risks if investments perform badly – even though the employer decides which scheme to enrol with. The criteria on which employers select a pension provider tend to focus on the cost to them and the ease of setting up a scheme. Important as these are to employers, they make no difference to the savers’ long-term outcomes. The research identifies a serious risk that members’ best interests will not be the determining factor by which pension providers succeed in winning market share over the next crucial years of the auto-enrolment journey.
In 2014, the Pensions and Lifetime Savings association (PLSA, then the NAPF) released data showing that 70% of UK adults “felt it important for pension providers to invest in companies that concentrate on avoiding unethical practices” and 49% would like their employer “to choose a provider which makes a specific point of investing ethically.”
ShareAction’s research examined the providers’ policies on a range of responsible and ethical investment topics known to be of interest to UK pension savers: executive pay, corporate tax transparency, climate change risk, investments in companies manufacturing controversial weapons, and human rights. It found that:
- Aegon is the only company to have a clearly disclosed policy of avoiding companies that manufacture weapons banned under the Inhumane Weapons Convention, such as cluster munitions. Aegon’s parent company is in the Netherlands where it is illegal for pension funds to invest in such firms. In the UK there is no such law, and there is no guarantee that funds are not invested in the manufacture of these controversial weapons. Four of the providers surveyed (Legal & General, Royal London, NEST and The People’s Pension) do not provide any public information on how they invest in arms in their default funds.
- Only four providers (Aviva, NEST, Standard Life and Legal & General) describe the need for companies’ remuneration policies to be linked to the long-term financial success of the company. None of the providers’ policies expect companies to provide their shareholders with comprehensive reporting on tax policy and taxes paid in different jurisdictions. Since 2008, corporate tax avoidance and executive remuneration have consistently been ranked as the top two issues that concern the public with regard to corporate behaviour.
- On climate change, Aviva got the highest score. Only Aviva, Aegon and Legal & General state that they invest in companies or projects that support the transition to a low-carbon economy and emissions reduction in the economy as a whole, a finding described as “concerning”.
Many of the providers do little or nothing to find out which investment issues their pension savers care most about. Only Standard Life surveys members of its default auto-enrolment fund on their views on investments. None of the providers give information in their annual statements to members about what they are doing to invest their savings responsibly with regard to environmental and social issues.
Catherine Howarth, Chief Executive at ShareAction, said: “At a time when thousands of employers in the UK are figuring out what pension provider to select for their workforce, we’re pleased to release information that will help employers make a choice that is guided by the long-term needs and interests of their staff. We’ve looked under the bonnet at the investment policies of the UK’s dominant players in auto-enrolment and found a serious gulf in performance between the best and worst when it comes to managing conflicts of interest, good governance and responsible stewardship of assets. These factors will make a huge difference to UK pension savers over the long-term.”
Camilla de Ste Croix, Senior Policy Officer at ShareAction and one of the report’s authors, said:
“We’re proud to have produced the first independent benchmarking survey of auto-enrolment pension providers, particularly as it’s not always easy to find out how and where pension savers’ money is invested. Although we found much room for improvement across the board, we also found that there is plenty of best practice that pension providers can draw on if they want to know how to improve. Whether looking at their peers at home in the UK, or oversees, particularly to the Netherlands, joining collaborative investor initiatives or making use of the many emerging international norms and standards its easier than ever for pension providers to invest more responsibly.”
Daniel Godfrey, former Chief Executive of the Investment Association, said: “Nobody has longer-term savings objectives than members of auto-enrolment pension savings arrangements. ShareAction’s report should encourage all investment managers to support companies that have long-term strategies. Real long term thinking requires serious approaches to human capital development, research and investment. It also means supporting – and if necessary, requiring – companies to look after the environment, pay their fair share of taxes, lobby governments with integrity, andaddress pay inequality and diversity. ShareAction is reinforcing the importance of long-term investment approaches to pension scheme members, to companies and to the economy.”
Jill Rutter, a Scottish Widows pension customer, said: “This research from ShareAction will help employers make more informed choices about which pension provider to use, and is a valuable resource for savers too. It’s really hard to find information about where your pension savings actually go, and not enough providers are taking the time to actually find out what their customers think. I am concerned about climate change and don’t want my savings to be invested in companies with high-carbon business models. Having this information publicly available puts pressure on all pension providers to take a more responsible approach to their investment practices.”