By Emmet McNamee (@inEmmetable), Senior Policy Analyst, PRI

Emmet McNamee

From today, UK pension funds have an explicit responsibility to integrate ESG issues into their investment approach. Pension funds will have to set out in their Statement of Investment Principles (SIPs) how they take account of financially-material considerations such as ESG issues and their approach to stewardship. Schemes may also set out how they integrate member preferences on, for example, sustainability impacts. This is an important step forward and should remove any remaining doubt that ESG consideration is an integral part of fiduciary duty.

Now the law is in place, we need to guarantee its effectiveness in practice. There are four key measures that need to be taken to ensure trustees are well-placed to navigate emerging ESG risks and opportunities and deliver outcomes for their members – not least, the transition to a net-zero carbon economy which will shape Britain’s economy for decades to come.

1. Bigger pensions – reducing market fragmentation

The UK has one of the most fragmented pension markets in the world. The 32,000 smallest schemes have just 200,000 people in them – an average of under seven people per scheme.

This is not just an anecdote: size matters. Smaller defined benefit schemes pass on higher running costs to their members – on average, over five times those of their larger counterparts. Governance tends to be weaker. On responsible investment, smaller pensions score more poorly across our Reporting Framework modules, and are significantly less likely to undertake key activities such as scenario analysis. While not a universal rule it’s hard to deny that, generally, bigger is better.

The government is committed to tackling the long tail of small schemes; this is good. Yet it should broaden its ambition: schemes with billions in assets tend to be better on responsible investment than even those with hundreds of millions. Including schemes of this size within consolidation efforts will also aid the government’s broader aims to boost pension investment in infrastructure.

2. Smarter pensions – improving trustee RI-literacy

It is increasingly recognised that ESG issues in general and climate change in particular will significantly affect returns over the coming decades. Around half of defined contribution savers are 25 years or more from retirement; the UK government has committed to cut its carbon emissions to net zero by the time most of these people retire. And yet TPR research demonstrates that only 20% of UK schemes consider climate change in their investment approach. At a time when the private sector needs to mobilise to support the low-carbon transition, 80% of pension funds may not even be protecting their members’ retirement savings from the risks arising from the defining issue of our time. Clearly, this cannot continue.

Trustees need to be informed about the economic transformation we are facing. A first step will be ensuring they’re equipped with basic education on ESG issues as part of their minimum TKU (trustee knowledge and understanding). This applies equally to the Independent Governance Committees of contract-based pensions as their remit is expanded to include ESG oversight. PRI tools such as RI for Trustees and the RI Review Tool can help.

3. Pensions that listen – understanding members’ views

Underpinning all of this is a need to ensure that pension scheme trustees are actually responding to what their beneficiaries care about.

First and foremost, they should ensure they are positioned to provide a stable and sustainable retirement income. However, beneficiaries’ savings finance the world they live and work in, as employees, consumers and community members, and there is increasing evidence that they want their savings to shape that world for the better. The latest proof: the Department for International Development’s “largest and most comprehensive study of the UK public’s demand for sustainable investment opportunities”, which found that 68% of UK savers want their investments to consider impact on people and planet alongside financial performance.

Pension funds need to get better at understanding what it is their members want from their pensions. There are already isolated pockets of good practice at home and abroad; trustees should seek to learn from one another. This need not always entail member surveys; schemes may make assumptions based on an understanding of their average member.

4. Tougher pensions – demanding better service

Pension funds constitute an enormous source of business for the financial industry, and too often have left ESG factors off the table when choosing who to work with, to the detriment of responsible investment as a whole. Many investment consultants have treated ESG issues as an optional add-on at extra cost rather than a part of core provision. A complaint to the Financial Conduct Authority earlier this year noted how few large UK asset managers had a dedicated voting policy on climate change despite the growing importance of this issue.

Pensions need to get better at proactively putting ESG issues on the agenda when their service providers fail to do so. Be loud and clear that ESG factors and real economy outcomes are important criteria in selecting who you do business with, and the market, in theory at least, will develop.


These four objectives reinforce each other. Bigger pensions will be in a better negotiating position with their service providers, while informed trustees will know better how to take action in response to members’ sustainability preferences. Taken together, these priorities constitute the beginnings of a strategy to equip UK pensions for the 21st century: ensuring member savings are better protected, member values are better reflected, and a better world for all of us is that much more likely.



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