UK regulator considers adding ESG to non-workplace pension rules

Consultation comes as Europe’s long-term fund structure is overhauled to encourage investment in green transition

The UK’s Financial Conduct Authority (FCA) has launched a consultation on whether it should require providers in the country’s £470bn non-workplace pension market to offer savers ‘default’ funds that take ESG considerations into account.  

Non-workplace pensions (NWPs) are used by self-employed workers or to supplement workplace pension pots, with around 13 million accounts. The FCA said that many pension savers “did not find it easy” to choose appropriate investments, with many keeping their pensions in cash and few actively reviewing their investments. 

Under the new proposals, NWP providers will offer savers a ‘default’ fund when they first open an account, designed to “meet the needs of the typical non-advised consumer choosing them”. On average, the consultation says, a default fund should offer savers “a better pension outcome […] than they could otherwise achieve”. 

As well as having a diversified pool of investments, the default funds should take “proper account” of climate change and other ESG risks. The FCA did not respond to a request for further detail.  

Tom Selby, Head of Retirement Policy at self-invested personal pension provider AJ Bell, said that the FCA “looks to be mirroring wider Government efforts to encourage mass-market retirement saving vehicles – and in particular default funds – to incorporate ESG into their investment strategies. Many would argue this is happening anyway, with ESG factors increasingly recognised as vital in delivering good member returns”. 

“While the Department for Work and Pensions is only pushing for increased reporting of the ESG impact of workplace default investments [which it is responsible for regulating alongside the Pensions Regulator], the FCA wants non-workplace default strategies to ‘take proper account’ of ESG impacts”.  

Helen Morrissey, Senior Pensions and Retirement Analyst at pension provider and investment platform Hargreaves Lansdown said: “These proposals will help those people who have a non-workplace pension but don’t feel confident making investment choices. They can provide a robust central point to people’s retirement planning that they then build on with other investments and tax wrappers. 

“In the current environment the expectation would be that such a solution would take ESG considerations into account, but given that these solutions are aimed at people who may not be engaged it is important to highlight that this is the approach being taken”. 

“As these funds will need to be something of a one-size-fits-all solution it is unlikely the FCA would go into huge detail on how this should be done. What we hope is that over time they may help increase awareness around ESG and drive increased investment in this area”. 

In other long-term investment news, the EU has unveiled a number of proposals designed to drive capital into underused ‘European Long Term Investment Funds’ (ELTIFs). 

First established in 2015, ELTIFs are fund structures designed to channel money into long-term investments, providing stable returns which are more resilient to market movements. However, there has been relatively poor take-up since 2015, with just 57 ELTIFs managing €2.4bn between them.  

The EU’s proposals aim to broaden the appeal of the product, with reduced restrictions on eligible assets and a removal of the minimum investment threshold for retail investors. Under the new rules, ELTIFs will be able to invest in water, forest and mineral rights, as well as commercial property and housing. 

According to the EU, the long-term nature of ELTIF investments makes them well placed to finance the green transition. At the start of October, impact investor ThomasLloyd launched an ELTIF investing in decarbonisation and transition infrastructure in emerging markets in Asia, while Mirova is seeking to raise €300m for an SDG-focused private equity ELTIF.