I hadn’t thought of Grant Thornton as thought leaders in pensions. On Friday I met with an old friend – Sandy Trust to talk about value for money. Well that’s what I thought we’d talk about- but Sandy –  canny scot that he is – showed me a little idea which I think has big implications for the way we value our workplace pensions. He’s called it “Sustainable Default Strategies” – or SDS’s. This is not the title such a good idea deserves – the public will hear STD and that will stick.

What Sandy has in mind – to use GT parlance – is “embedding sustainable finance in the workplace channel”. To speak to the ordinary person, that means making  responsible investing standard practice for the money we save through auto-enrolment – into pensions.

A lot of people don’t know that their savings are invested, we know that through work done by Ignition House and others. Most who discover their money is invested in stocks and shares assume that this will be done carefully with an eye for good. They are shocked to find that their money may be funding the sale of cluster-bombs by Raytheon (for instance).

So one argument for embedding sustainable finance in the workplace channel is that many people assume that investment managers are doing it, and aren’t please to discover that they aren’t.

Such people have a right to an answer to the question “why not?”. I guess the brutal answer is that any kind of responsible investing requires a manager to take that responsibility and get paid for it.

I can see no evidence based argument that suggests that investing in a green way delivers less – indeed every chart I read, suggests that against relevant benchmarks, green investment delivers more. Take this chart from People’s Pension B&CE ethical fund factsheet (for instance).

As it stands, the people who manage the platforms on which investments sit – the workplace pension providers – are unwilling to pay any more for investment management than they have to. This is because there is no commercial gain in giving people something that the platform manager gets no credit for – but has to pay for.

According to the amount that I am paying for Future World (0.24% pa), L&G’s green version of it’s global equity fund (which I’d pay 0.10% for) is 2.4 times as expensive. That’s fine for me as I can see the cost of the investment strategy clearly displayed on L&G’s website.

But if I use a platform (such as People’s Pension ) where the cost of the fund is not displayed, then I don’t get such a clear picture. If I search for the B&CE Ethical Fund on the People’s Pension site, I find it’s priced at 0.50% – the same price as the Global Equity fund. Now there’s a problem here – which is that when People quote one price for both, I can assume that the ethical fund is being cross-subsidised.

Which probably explains why neither the LGIM  Future World of B&CE Ethical fund, form part of the default investment strategy of the L&G and People’s Pension funds respectively.

For L&G to keep the headline pricing of their workplace pensions the same and to adopt a more expensive fund, they would have to absorb the extra expense by dropping the cost of FutureWorld to that of the default. For B&CE to swap its current global equity default for the ethical fund, they’d have to take a drop in margin on the 0.50% they charge to all those in the current default (which we can assume to be rather less expensive to buy from State Street – the fund manufacturer).

You may think that providers offering more for less is Pie in the Sky but it does happen. NEST has recently “greened up” its default fund without increasing the price we pay. They appear to have done this at no cost to punters (of which I now am one).  People’s and L&G and a host of other workplace pension providers take note.

The argument that the default investment funds into which the majority of the 10m new savers we have into auto-enrolment can’t afford to be green has just been blown up. 7.1m of those savers are with NEST and NEST has just gone green. 70% of the new savers are investing in a green way. So why not all the old savers – and what about the 30% who have auto-enrolled  with other workplace pension providers than NEST?

Moving to sustainable default funds

I’m currently in trouble with L&G and particular trouble with its IGC for berating them about not moving to a green default and – in the case of the IGC – not calling L&G to put their money where LGIM’s mouth is and use FutureWorld as part of its default.

There is now even more reason for using FutureWorld as there is a FutureWorld version of the L&G default fund (called its multi-asset fund). The only reason I can think of for L&G not moving to the Future World Multi-Asset Fund immediately is because it would mean it putting its price up or taking its margins down.

I want to see the 2019 L&G IGC’s Chair’s statement clearly addressing this issue and giving us the good news that L&G will adopt FutureWorld or putting a rocket up L&G’s backside if it is found to be ducking the issue (as it has so far).

Similarly, I call on Steve Delo and the other trustees at the People’s Pension master trust to put pressure on People’s CIO – Nico Aspinall to change the People’s Pension default fund to include the B&CE ethical fund – or equivalent – to make the People’s pension a lot greener. Nico is a big fan of sustainable investments and I suspect work is underway, but come on guys – how long does this kind of thing take?

So once we have NEST, L&G and People’s showing the way, how long before we have greener defaults elsewhere? How long before workplace pension providers either put up their prices to offer these kind of funds, or absorb the increased cost of the product in their margins?

Back to Grant Thornton

I’m very keen to include the information about “how green is my pension” in AgeWage scores. It looks like GT – and Sandy in particular – could be great allies in that.

The big consultancies can be a force for good in getting people what they want and AgeWage scores could be a way of showing people they are getting what they want – sustainable investment strategies – responsible investment and a better way forward for their pension monies.

If we really believe in the “value” in the value for money equation, we have to find value in workplace pension defaults “embedding sustainable value in the workplace”

Sandy Trust – Grant Thornton