Responsible Investment Could Unlock £1bn Annual Pensions Boost

From Franklin Templeton
Contact Saira Khan
Telephone (0)20 70738644

RESPONSIBLE INVESTMENT COULD UNLOCK £1BN ANNUAL PENSIONS BOOST

London, 18th September 2019: Defined Contribution (DC) pension schemes are potentially missing out on a significant increase in annual contributions as they are not fully aligned with the values of members according to a new study ‘The Power of Emotions: Responsible Investment as a Motivator for Generation DC’ by Franklin Templeton1.

The study which explored the emotional responses to workplace pensions and responsible investment (RI) of ‘Generation DC’ – the first cohort of people that will rely predominantly on their DC pension savings in retirement, currently aged between 22 and 38 revealed that DC schemes could see a boost in annual member pension contributions of £1.2bn2 by better integrating responsible investment.

Partnering with Adoreboard3, a pioneer in Human Experience (HX) using Emotion Artificial Intelligence analysis, the study focused on measuring emotional responses to quantify human experiences of more than 2,500 people in relation to workplace pensions and responsible investment. The study identified an ‘emotional experience gap’ for Generation DC – demonstrating a wide disconnect between how people feel about their pension and what it currently delivers with only a fifth (22 per cent) of respondents feeling that their pension scheme was aligned with their values.

Schemes missing out on responsible investment contribution boost

Workplace pensions are an emotive issue for Generation DC, with a significant volume of high-intensity emotions being expressed in response to questions on the topic. Responsible investment is a particularly emotive issue for the group, with many associating the theme with both strong financial returns and an alignment with their personal beliefs.

However, DC schemes have either yet to reflect this through the investment options on offer to their members or are failing to communicate what the scheme is already doing in this area, potentially missing out on a huge boost to contributions. Nearly half of respondents (45 per cent) would be willing to make additional contributions to their pension pots if RI was incorporated into their pension, while more than half (51 per cent) believed RI should be built into the default investment fund.

Of those willing to make additional contributions, over two thirds (70%) would contribute an extra 1-3% of their salary per month, while 14% would contribute an additional 4-5% per month, which combined would mean a boost of up to £1.2bn per annum4.

UK employees paid £7bn into workplace DC schemes in 20185, meaning additional contributions through RI solutions could account for an almost 20 per cent rise in annual employee contributions, and up to £12bn over the next decade6 for this cohort of savers alone.

David Whitehair, Head of UK DC at Franklin Templeton, said: “The introduction of auto-enrolment and pension freedoms has tackled some of the structural changes required in the UK DC market while giving individuals ownership of their financial futures, but this is just the beginning. Our industry needs to stop seeing savers as statistics and better understand them as people. Through better aligning themselves with topics their members are passionate about, schemes can help to drive engagement and ultimately look to boost contribution rates.

“Our findings show that responsible investment could go some way towards bridging this gap. We encourage scheme providers to consider how responsible investment, in its many forms, can be incorporated into their DC investment design, particularly the default investment. Many schemes do not currently have responsible investment options, while some offer ethical screening funds which, as our research shows, do not necessarily represent the values of younger generations. If responsible investment is more effectively integrated into DC investment design, it could serve the purpose of providing a significant boost to pension contributions, better engaging generation DC in their retirement savings and also providing additional capital for sustainable investment projects globally.”

Julie Moret, Head of ESG at Franklin Templeton, added: “The survey findings underscore a shift in investor preferences as part of the largest intergenerational transfer of wealth. Compared to baby boomers, millennials are placing far greater importance on seeking attractive returns alongside positive environmental and social outcomes. Alongside the influence of these demographic shifts, the growing relevancy of sustainability challenges such as climate transition impacts, resource use and circular economy solutions are driving investor appetite for responsible investing up the agenda.

“As the industry moves away from a negative exclusionary only approach to integration and positive screening, the survey encouragingly shows that this is being reflected in the values alignment of the younger generation and the investment options they are actively seeking.”

The survey also showed:

  • There is clear alignment between the issues that the fund management industry is trying to tackle through RI, and the issues that Generation DC cares most about. The top issues respondents most identified with were: climate change (55 per cent), animal welfare (48 per cent) and plastic/excess packaging (41 per cent).
  • Employer contributions remain key for savers, with 43 per cent ranking this as the most important attribute of their workplace pension. This was followed by having RI incorporated, by nearly a third (29 per cent).
  • Responsible investment and tech can drive greater engagement. The majority (78 percent) of respondents said that they would engage with their pension statement if information on RI was included. They also want the information at their fingertips in an app (58 percent).

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Responsible Investment Could Unlock £1bn Annual Pensions Boost

Contacts:

Franklin TempletonFTI Consulting
Saira KhanErica Lewis
Corporate Communications ManagerConsultant
Franklin Templeton, Cannon Place, 78 Cannon StreetFTI Consulting, 200 Aldersgate Street
London EC4N 6HLLondon EC1A 4HD
Tel: 020 7073 8644Tel: 020 3727 1514
Email: saira.khan@franklintempleton.co.ukEmail: erica.lewis@fticonsulting.com

Notes to Editors:

  1. Franklin Resources, Inc. [NYSE:BEN] is a global investment management organization operating as Franklin Templeton. Franklin Templeton’s goal is to deliver better outcomes by providing global and domestic investment management to retail, institutional and sovereign wealth clients in over 170 countries. Through specialized teams, the company has expertise across all asset classes, including equity, fixed income, alternatives and custom multi-asset solutions. The company’s more than 600 investment professionals are supported by its integrated, worldwide team of risk management professionals and global trading desk network. With employees in over 30 countries, the California-based company has more than 70 years of investment experience and over $690 billion in assets under management as of August 31, 2019. For more information, please visit www.franklintempleton.co.uk.
  2. Calculations are based on the total 6.31million DC savers aged between 22-39 (source: ONS ASHE Survey 2018) and earning the median salary in the UK for this age group £28,086 pa (source: ONS annual employment survey 2018). Qualifying earnings calculated as £21,950. This number excludes any additional matching employer contributions.
  3. Adoreboard, a Queen’s University Belfast spin-off, is a pioneer in Human Experience (HX) using Emotion AI, the next frontier of artificial intelligence. Adoreboard unites customer and employee experience through its Human Experience (HX)measurement platform Emotics. Adoreboard’s mission is to bring emotionally-intelligent insights into the digital world with its emotion recognition technology that measures Human Experiences that span customer and employee interactions across the enterprise. Adoreboard is a Gartner Cool Vendor in AI for Customer Analytics.
  4. Calculations are based on the total 6.31million DC savers aged between 22-39 (source: ONS ASHE Survey 2018) and earning the median salary in the UK for this age group £28,086 pa (source: ONS annual employment survey 2018). Qualifying earnings calculated as £21,950. This number excludes any additional matching employer contributions.
  5. Sources: ONS MQ5 Table 4.3 Self-administered pension funds’ income and expenditure and ONS PEN2 Personal Pensions (including stakeholder pensions): Scheme members’ annual contributions
  6. Calculations are based on the total 6.31million DC savers aged between 22-39 (source: ONS ASHE Survey 2018) and earning the median salary in the UK for this age group £28,086 pa (source: ONS annual employment survey 2018). Qualifying earnings calculated as £21,950. This number excludes any additional matching employer contributions.

This press release is intended to be of general interest only and does not constitute professional advice. Franklin Templeton and its management groups have exercised professional care and diligence in the collection and processing of the information in this press release. Franklin Templeton makes no representations or warranties with respect to the accuracy of this document. Franklin Templeton shall not be liable to any user of this report or to any other person or entity for the inaccuracy of information contained in this press release or for any errors or omissions in its contents, regardless of the cause of such inaccuracy, error or omission.

Any research and analysis contained in this document has been procured by Franklin Templeton for its own purposes.

Issued by Franklin Templeton Investment Management Limited (FTIML). FTIML is authorised and regulated in the United Kingdom by the Financial Conduct Authority.

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