RI could boost DC contributions by £1.2bn a year

Defined contribution schemes could see a boost in annual member pension contributions of £1.2bn by better integrating responsible investment (RI) into their funds, according to Franklin Templeton.

The investment manager has used an emotion artificial intelligence tool called Adoreboard to measure the emotional responses of more than 2,500 DC members in relation to workplace pensions and RI.

The machine identified an “emotional experience gap” for what Franklin Templeton calls “Generation DC” — the first cohort of people, currently aged between 22 and 38, that will rely predominantly on their DC pension savings in retirement.

Adoreboard has found a disconnection between how people feel about their pension and what it currently delivers, with only a fifth of those tested feeling that their pension scheme was aligned with their values.

Nearly half of those contacted for the study respondents (45 per cent) would be willing to make additional contributions to their pension pots if RI was incorporated into their pension, while more than half (51 per cent) believed RI should be built into the default investment fund.

Of those willing to make additional contributions, over 70 per cent would contribute an extra one to three per cent of their salary per month, while 14 per cent would contribute an additional four to five per cent per month.

According to ONS data, there are 6.31 million DC savers aged between 22-39, earning a median salary of £28,086, while UK employees paid £7bn into workplace DC schemes in 2018.

Using these figures, Franklin Templeton has estimated that additional contributions through RI solutions could account for an almost 20 per cent rise in annual employee contributions, adding up to £12bn over the next decade for this cohort of savers.

Franklin Templeton head of UK DC, David Whitehair, said that the study had shown that the pensions industry needed to stop seeing savers as statistics and “better understand” them as people.

“Through better aligning themselves with topics their members are passionate about, schemes can help to drive engagement and ultimately look to boost contribution rates,” he argued.

“Many schemes do not currently have responsible investment options, while some offer ethical screening funds which, as our research shows, do not necessarily represent the values of younger generations.

"If responsible investment is more effectively integrated into DC investment design, it could serve the purpose of providing a significant boost to pension contributions, better engaging generation DC in their retirement savings and also providing additional capital for sustainable investment projects globally.”

Franklin Templeton head of ESG, Julie Moret, added: “The survey findings underscore a shift in investor preferences as part of the largest intergenerational transfer of wealth.

"Compared to baby boomers, millennials are placing far greater importance on seeking attractive returns alongside positive environmental and social outcomes.

"Alongside the influence of these demographic shifts, the growing relevancy of sustainability challenges such as climate transition impacts, resource use and circular economy solutions are driving investor appetite for responsible investing up the agenda.”

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