Financial illiteracy preventing workers from aligning pension investments with ethics

A lack of financial literacy is preventing employees from aligning their pension investments with their ethics, LCP has warned.

A survey conducted by the consultancy found that while only one in six respondents felt that investing ethically was an important factor when investing over the long term, around three-quarters said they would want to avoid investing in companies involved in certain unethical practices.

Workers were asked whether they would consider placing their savings in companies that invested in nine unethical areas.

The top three areas that people said they would not invest in were: Using child labour, harming the environment and treating employees poorly.

LCP noted that the conflict in responses seen in its survey is played out in practice in many defined contribution (DC) schemes, as typically less than 5 per cent of a scheme’s assets are invested in ethical investment offerings.

The consultancy added that the findings highlighted a disconnect in what pension scheme members say they want and what they are actually doing.

Ease of access, maximising investment return and the ability to make changes to investments easily came out on top when respondents were asked what the most important factors to consider were when investing money for the medium and long term.

However, LCP noted that, in many DC schemes, less than 10 per cent of members select their own investments.

“The fact we aren’t seeing many pension scheme members taking up options to invest ethically doesn’t mean that people don’t care about ethical issues and indeed this would go against the grain of the shift in attitudes that we are seeing in society,” said LCP partner, Nigel Dunn.

“It is more likely that people lack the financial know-how and is another reminder that as an industry we need to tone down the jargon and give members simple clear guidance to nudge them towards making decisions that are in their best interests.

“With pensions dashboards are now on the horizon, we have a real opportunity to reboot pensions for the modern world and give members the experience they are used to in all other areas of their life.”

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