[Skip to content]

Sign up for our daily newsletter
The Actuary The magazine of the Institute & Faculty of Actuaries

Half of DC pensions to add ESG focus to their default investment strategies

Half of defined contribution (DC) pension schemes in the UK plan to include or continue an environment, social and governance (ESG) focus in their default investment strategy.

Changing ESG investment strategies ©iStock
Changing ESG investment strategies ©iStock

That is according to new research from Willis Towers Watson (WTW), which also found that 46% of schemes are considering ESG as a self-select option.

This would bring the total proportion of DC pensions offering ESG as a self-select option to two-thirds, with trust-based schemes most likely to be considering this.

The research involved a survey, now in its fourteenth year, of FTSE 350 pension schemes, finding that 54% plan to review their default investment approach within the next two years.

“This year’s survey highlights areas in which significant change has occurred, or is being considered, in relation to ESG investment strategies,” WTW senior director, Anne Swift, said.

“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.”

WTW said its research provides the “largest and most representative” survey of DC pension provision in the UK.

It found that equities dominate in the early growth phase for default investment strategies, representing a 65% allocation.

Closer to retirement age, 10 years out, this reduces to 40%, but at retirement, there is still a 15% allocation to equities.

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

It was also found that 98% of FTSE 350 companies offer DC pensions to new entrants, and that 45%% have “hard-closed” DB schemes. Around 20% have only ever offered DC schemes.

FTSE 100 companies’ employer core contribution are up to 7.1% this year, compared to 6.4% in 2018, while FTSE 250 firms have seen a rise from 4.3% to 6.1%.

Swift added: “With 98% of FTSE 350 companies offering DC pensions to new entrants, employers are clearly more focused than ever on reviewing and diversifying the design and delivery of their DC schemes.”

Sign up to our free newsletter here and receive a weekly roundup of news concerning the actuarial profession