39% of DC schemes failing to take account of ESG in default strategies

Around 39 per cent defined contribution (DC) pension schemes do not include environmental, social and governance (ESG) factors in the design of their default investment strategies, research from LCP has found.

The survey showed that whilst 50 per cent of schemes were taking account of ESG investing "to some extent" in the design of their default investment strategy and 11 per cent were taking account "explicitly so", others were lagging behind.

In addition to this, around 49 per cent of DC schemes did not have agreed metrics in place for their DC plan.

The findings have prompted concern that a "sizeable number" of DC schemes are not taking account of ESG, with LCP urging schemes to take action on climate risks and opportunities sooner rather than later.

“The time really is now to review, design and set investment strategies that consider E, S and G, as the raft of policy announcements on sustainability from the government this week ahead of COP26 reminds us," LCP head of DC, Laura Myers, commented.

The report also found varying attitudes as to the responsibility of employers, as whilst more than three-quarters (77 per cent) agreed that it is the employer’s responsibility to provide sufficient income for employees to retire, 23 per cent disagreed.

A further 40 per cent of organisations stated that their approach to scheme design was influenced by the desire to provide a reasonable retirement income, while 38 per cent cited sector benchmarking as an influence.

A similar division could also be seen in the level of contribution offered, with 46 per cent of organisations offering a total contribution that simply meets the legal minimum requirement of 8 per cent.

In 25 per cent of DC schemes, meanwhile, the employer contributes less than the minimum employee contribution, and in 41 per cent of organisations the maximum employer contribution was at least 10 per cent.

The report also found that 52 per cent of DC schemes supplement the regular communications with bespoke member communications at least once a year, although less than 24 per cent of organisations have conducted an employee survey in the past two years to seek member views.

Indeed, over 60 per cent of respondents identified communications-related improvements as the most important changes they could make other than increasing contribution levels.

“The results of the survey show that on the whole, schemes are heading in the right direction especially in the context of the turmoil of the last 18 months or so. Innovation is going to be the watchword,” Myers commented.

“Those schemes that can use technology savvily to understand the membership will design investment and communications strategies that deliver the best results for employees.”

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