In the last few years, the financial services industry has become preoccupied by three letters: ESG. Environmental, social and governance issues matter more and more to investors and legislators. Furthermore, recent evidence would suggest that ESG investment is no longer a compromise for lower returns. In S&P analysis for the year to March 2021, of 26 funds that met ESG criteria, 19 outperformed the S&P500.
While people used to be happy to put their money into a pension and perhaps glance at a statement once a year, they now want to know exactly where that money goes. And pension providers are sitting up and taking note.
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To stay competitive, providers will need to match their growing sustainability credentials with a new kind of customer experience.
Spurred by customer sentiment and regulations, investment is changing, and major pensions providers are showing they get it. Many pension providers offer ESG funds as an option, but some are going much further. Several UK-based providers, like Nest, Scottish Widows and Legal & General made big commitments in 2020, withdrawing investment from funds that don’t meet their ESG criteria, or setting net zero emissions targets across their portfolio. Perhaps the most significant was Aviva’s net-zero target for its default auto-enrolment funds. This signals a significant switch from sustainability as niche investment choice at the margins to mainstream principle at the core. It also spares investors the hassle of opting into sustainable investments, with most investors opting to simply auto-enrol.
But even this is just the start. To signal that sustainability really is at the heart of who pension providers are and how they do business, they must do more than overhaul investment strategy.
Green-washing existing literature and websites isn’t enough. Customers must be able to easily see where their specific policy is invested and have the option to move their money to a different fund if that suits them. And this is likely to become more nuanced. Within the ESG umbrella, pension scheme members may have a particular preference for investments that support climate change, bio-diversity, good governance or any number of emotive topics.
They must also be able to examine the sustainability credentials of the pension provider as a whole, not just the fund. Investors will no longer be happy to invest in ESG products but look the other way while their provider carries on backing harmful enterprises elsewhere in the firm. Like other businesses, pension providers have to show they’re good corporate citizens as well as experts in their field. This will mean nothing short of reshaping firms’ culture so sustainability becomes a core principle, not a nice-to-have or an after-thought.
So, how can pension providers convince their customers about their sustainability stance, and that their ESG values run deeper than a little social media activity?
Significant though new investment commitments are, providers must follow through on them with their customer experience. Where once the mystique around pensions meant savers were happy to let fund managers practice their art undisturbed and unscrutinised, lack of transparency now only arouses suspicion. Providers must clearly show where they’re investing customers’ money through online portals that are easy to navigate, and be really clear on the purpose of the fund as well as the impact of the underlying investments
Digital native providers like Nutmeg have consistently showed they’re better at this than incumbents. For established firms to preserve their market share, they’ll need to meet these expectations. It’s as much an IT challenge as a strategic and cultural issue. Most providers’ systems are likely to need a fundamental overhaul to make this kind of usability and responsiveness possible.
The starting point is a clear vision for what the experience should be and a plan for how to achieve it. It will also mean mapping and analysing every part of the customer journey, from publicity and onboarding to annual statements and retirement packs. It should be simple for customers to set up and access their accounts, see their details and understand where their money is invested. Throughout this process, firms have the chance to remind customers of the ethos behind their strategy. That should be part of everything they see and hear, so they develop a sense that they’re part of something more than a profit-making enterprise.
In parallel, the new Pension Schemes Act means, among other things, that schemes need to be clear how their investments stack up in terms of climate change and the UK’s net zero targets. Trustees will have to review what climate change means for their investment strategy, manage their exposure to climate risk and set targets accordingly.
Broader changes to the pension landscape will also drive a focus on ESG credentials. The government-backed Pensions Dashboard promises to let users see all their pension information in one secure place online. Pension providers will have a legal obligation to make this information available. As well as forcing providers to get their data in order, it’s also likely to mean a spike in engagement with customers who suddenly want information about pension pots they’d forgotten they had. Sleepy pension providers and trustees that are on the back foot when it comes to ESG investment may will suddenly be exposed to better informed customers. Money will quickly switch to pension providers with a more ESG-friendly offer and a stronger organisational purpose.
Being transparent about sustainability in investments, stewardship and ESG policy, as well as issues like diversity and executive pay, must be near the top of firms’ to-do lists. And so must making this information easy to find on their website. This sends a clear signal about how much it matters to them, and how important it is to them that customers get the message.
In parallel, a steady customer communication effort based on thought leadership and commentary on ESG and sustainability establishes the firm’s point of view and helps build its reputation as a source of expertise on the subject. And the internal audience must be just as clear about it as customers and their advisors, so the story comes across consistently every time customers interact with the firm. This will only come through a concerted internal communication and training effort.
The better firms are at communicating their principles early and consistently, the deeper the relationship between them and investors can be. In turn, that could grow pension investors into advocates and customers for other financial products. Conversely, any weak link in the customer journey will undermine the whole experience and jeopardise trust.
In a relatively short time, pension providers have had to make a substantial switch from a default position of ‘trust me, I’m an expert’ to, ‘let me explain. I want you to understand.’ That attitude shift is being put to an even bigger test with the need to link investment strategies and purpose to the whole customer experience. The rewards for firms who can make the leap will be a deeper and more profitable relationship with customers than they thought possible.