Trust based schemes more likely to consider ESG in defaults - WTW

Trust-based DC schemes are far more likely to be considering implementing ESG filters in their default funds than their contract-based counterparts, according to Willis Towers Watson (WTW).

WTW's 14th FTSE DC Pension Scheme Survey, has shown that 69 per cent of contract-based schemes do not focus on ESG in their default funds, as opposed to 33 per cent of master trusts and 18 per cent of trust-based schemes.

Fifty per cent of trust-based schemes see ESG as an emerging focus, and a further 32 per cent see it as either a continuing focus, or an issue that is already at the forefront of their thinking.

Only 19 per cent of contract-based schemes view ESG as an emerging focus and only 12 per cent treat is as either a continuing or established focus.

The consultant’s latest examination of DC provision has also discovered that
just over half of DC pension schemes are looking to incorporate (or are continuing to include) ESG into their default strategy in the near future.

Furthermore, 46 per cent are considering adding it as a self-select option, bringing the share of schemes offering ESG as a self-select option to two-thirds of the UK’s DC universe.

WTW senior director of investments, Anne Swift, said that the study shows that significant change has occurred, or is being considered, in relation to ESG investment strategies.

“This is being driven by both the expectation of better investment outcomes and the demand from DC pension members to reflect these factors in their retirement savings,” explained Swift.

The findings follow news earlier this week from Sackers showing that less than a fifth of pension trustees and managers believe that DC trustees are doing enough to take ESG factors into account when considering appropriate investment options for members.

The WTW report also stated that 54 per cent of DC schemes plan to review their general default investment approach in the next two years.

As default investment strategies continue to evolve, equities dominate in the early stages of the growth phase with a 65 per cent allocation.

Ten years out from retirement age this reduces to 40 per cent on average, but at retirement, there is still a 15 per cent allocation to equities.

Fewer than 20 per cent of schemes now target annuity purchase as the default retirement outcome, with two-thirds having replaced that with an income-drawdown or universal target.

“With 98 per cent of FTSE350 companies offering defined contribution pensions to new entrants, employers are clearly more focused than ever on reviewing and diversifying the design and delivery of their DC schemes,” added Swift.

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