Defined Contribution (DC) pension schemes are potentially missing out on a significant increase in annual contributions as they are not fully aligned with the values of members, according to a new study ‘The Power of Emotions: Responsible Investment as a Motivator for Generation DC' by Franklin Templeton.
The study, which explored the emotional responses to workplace pensions and responsible investment (RI) of ‘Generation DC' - the first cohort of people that will rely predominantly on their DC pension savings in retirement, currently aged between 22 and 38, revealed that DC schemes could see a boost in annual member pension contributions of £1.2bn by better integrating responsible investment.
Partnering with Adoreboard, the study focused on measuring emotional responses to quantify human experiences of more than 2,500 people in relation to workplace pensions and responsible investment. The study identified an ‘emotional experience gap' for Generation DC - demonstrating a wide disconnect between how people feel about their pension and what it currently delivers with only a fifth (22 per cent) of respondents feeling that their pension scheme was aligned with their values.
Schemes missing out on responsible investment contribution boost
Workplace pensions are an emotive issue for Generation DC, with a significant volume of high-intensity emotions being expressed in response to questions on the topic. Responsible investment is a particularly emotive issue for the group, with many associating the theme with both strong financial returns and an alignment with their personal beliefs.
However, DC schemes have either yet to reflect this through the investment options on offer to their members or are failing to communicate what the scheme is already doing in this area, potentially missing out on a huge boost to contributions. Nearly half of 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 two thirds (70%) would contribute an extra 1-3% of their salary per month, while 14% would contribute an additional 4-5% per month, which combined would mean a boost of up to £1.2bn per annum.
UK employees paid £7bn into workplace DC schemes in 20185, meaning additional contributions through RI solutions could account for an almost 20 per cent rise in annual employee contributions, and up to £12bn over the next decade6 for this cohort of savers alone.
David Whitehair, Head of UK DC at Franklin Templeton, said: "The introduction of auto-enrolment and pension freedoms has tackled some of the structural changes required in the UK DC market while giving individuals ownership of their financial futures, but this is just the beginning. Our industry needs 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.
"Our findings show that responsible investment could go some way towards bridging this gap. We encourage scheme providers to consider how responsible investment, in its many forms, can be incorporated into their DC investment design, particularly the default investment. 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."
Julie Moret, head of ESG at Franklin Templeton, 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.
"As the industry moves away from a negative exclusionary only approach to integration and positive screening, the survey encouragingly shows that this is being reflected in the values alignment of the younger generation and the investment options they are actively seeking."