Make sure your pension scheme supports a sustainable future.

A whopping £87 billion a year is paid into Britain’s pension schemes – a figure predicted to increase sixfold over the next two decades. These savings aren’t just sitting in a bank somewhere, though – they’re invested in a variety of funds and companies designed to maximise returns for savers’ futures.

The problem is, the majority of these savings are being invested in ways that actually jeopardise everyone’s future. As Good With Money writes in its Good Guide to Pensions, “Nine times out of ten, pension savings are going into tobacco firms, oil and gas majors, mining, big pharma and big banks: social, climate and environmental breakdown, in other words.”

But there are alternatives, and the more people that make sure their pension funds are being put to ethical, sustainable use, the higher the chance of there being a healthy, sustainable planet for those that will be relying on those very pensions in their old age. After all, there’s no point saving for the future if there isn’t going to be a future.

What is a green pension?

A green pension is essentially a fund that aims to earn interest for its savers through investment in environmentally-positive, low-carbon companies. Historically, these were seen as a poorer-performing alternative to ‘traditional’ pension funds, which invested in more supposedly ‘lucrative’ things such as fossil fuels. But the tide is turning as more pension providers recognise the importance of long-term sustainable investment and COVID-19 has seen a huge drop in demand for oil, reflected in their share prices.

NEST, for example – one of the UK’s biggest pension providers – has a clear climate strategy to support renewable energy. Back in 2018, meanwhile, Legal and General Investment Management – which looks after the increasingly popular Future World Pension Plan – announced that it would be taking action against companies that aren’t addressing the risks of climate change.

Green pensions are becoming increasingly popular – almost a fifth of UK savers are choosing an environmentally friendly pension product, according to data from online firm PensionBee. And this yields two significant benefits: not only do these funds ensure responsible companies are backed with the cash they need to help make the world greener and more sustainable, but pension savings are likely to be safer in the long-term if invested in firms that are prepared for climate change and similar risks.

Who can have a green pension?

In short, everyone can – although UK pension regulations do impose some challenges (see below). It’s probably not a surprise to learn that they’re more popular with younger savers concerned about the future of the planet, while older people already approaching retirement are general less concerned with climate risk. Indeed, you may well already be paying into a green pension fund. A survey from financial services firm Investec recently found that 47% of people surveyed – that’s almost half of all pension holders – don’t actually know where their workplace pension is being invested. Meanwhile, more than a quarter of Brits aren’t aware of their workplace pension scheme at all.

How can I get a green pension?

If you’re self-employed, you won’t be automatically enrolled into a pension scheme, and you can choose a pension yourself. Good with Money’s Good Guide to Pensions is a great place to start researching responsible options.

If you work for an employer, however, things are a little trickier. The introduction of automatic enrolment in 2012 means that if you’re over 22, earning more than £10,000 and are being employed by someone, you’ll be paying into a pension. Unfortunately, you don’t always get much say over what that pension is – it’s often decided by your employer.

If you’re in a defined contribution pension scheme, you’ll usually have the choice between two or more funds. If you’re in a defined benefit (or ‘final salary’) scheme you normally don’t, and you’re paying into the fund determined by your employer. Now, you have the choice to opt out of your automatic enrolment provider and pay into a personal pension instead (as self-employed people do). However, one of the main benefits of the current pension system is that your employer matches all of your contributions to your pension – if you opt out, you’ll almost certainly lose this, meaning your pension pot won’t be worth as much come retirement.

So what can be done? Firstly, it’s important to find out exactly where your pension payments are going (your HR rep will be able to help with this). Then, speak to your colleagues about the way your pension payments are being invested. Raise awareness of the problematic nature of fossil fuel investments, and consider starting a petition to encourage your employer to move to a greener scheme. Don’t forget, doing so will be in their best long-term interests, too.  Make My Money Matter is a great resource.

Are green pensions riskier than traditional ones?

Yes and no. As we already mentioned, they’re certainly the more sustainable, long-term option. However, as ShareAction explains: “One of the main ways to tackle investment risk is to ‘diversify your portfolio’. This means buying lots of different financial products, so that you don’t have too many eggs in one basket should that investment fail. As responsible pensions won’t invest in certain companies, you may have fewer baskets. This means the risk to you is higher.” But this will change as more and more companies adopt sustainable practices, which they will have to if they’re to survive in the long run.

The bottom line

Your pension has an impact on the world around you, right now and in the future, and the way we look after our money is just as important as the way we spend our money when it comes to fighting climate change. Financial products have an enormous influence on the planet, and pensions are no exception. Banks, providers and funds need to be held to account when it comes to climate matters, and the best way you can encourage that is by choosing services that have a positive impact on the planet. Furthermore, the more people who learn about the impact of pensions, and start taking action, the more those who design funds will have to listen.

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