Ethical Pensions

Finding an ethical pension provider

With such a difference in ratings in the brands we reviewed in this guide, it's clear that there are some ethical pensions which are more ethical than others.

Raising awareness of a pension’s ethical dimensions can feel like an uphill battle. Pensions appear technical and functional, rather than political, so bringing them up at the dinner table all but guarantees a round of groans.

Perhaps it's the association with ageing, perhaps it's the fact that for most of your life they only deplete your pay-packet, but many people don’t really consider their pension until retirement looms and it sits poised to liberate them from work.

Most rely instead on their employer or a private pension provider to make good choices on their behalf.

Switching a pension may lack the glamour of other ethical purchases, but behind this wall of banality lies a massive amount of invested money, with huge potential to reshape our environment and society for better or for worse. Some £3 trillion is invested in pensions in the UK alone, so it’s incredibly important that it is invested well.

What do pension providers actually do?

Comparing one pension against another is difficult because pension brands are owned and operated by such a wide range of different company types.

Some are dedicated pensions providers, like Nest and the People’s Pension. Others, like Legal & General, Fidelity, and Royal London, offer pensions alongside a range of other investment and insurance products. Much of these companies’ focus is on 'asset management' – building investment portfolios, managing funds, and engaging with investee companies.

Other providers do not directly manage investments, and either invest in indexes managed entirely by external asset managers (AJ Bell, PensionBee), or act primarily as interfaces that allow individual savers to pick and choose investments in a range of external funds themselves (Circa5000, Moneyfarm). Although these companies have quite distinct functions, we believe that they share a responsibility to invest your pension responsibly and transparently.

Finding an ethical pension

What makes a pension ethical? An ethical pension provider should follow ethical criteria when deciding how to invest your money and should be transparent about where they invest. It should be easy for individuals to decide whether or not they want to invest in a given fund.

Much of the money that you pay into your pension will be invested in company shares (equities), making you a part-owner of that company. If your pension is not invested in an ethical fund you will likely be the part-owner of companies in a whole range of unethical sectors such as arms, tobacco, and fossil fuels.

It’d be a mistake to frame our thinking around pensions as simply avoiding the negative consequences of investment. Moving your money to an ethical fund can mean that you are supporting important sectors such as healthcare, or companies aiding the transition to a low-carbon economy.

It is crucial that we see pensions as more than just a route to later-life financial security. Most people’s pension will be the largest investment they ever hold, so choosing an ethical pension is one of the most ethically productive things you can do.

'Sustainable', 'responsible' and ESG pensions: how ethical are they in reality?

One certainty around the boom in ethical / ESG / sustainable / responsible investing over the last couple of decades is that it’s introduced a diversified portfolio of buzzwords into the pensions market. (Our jargon buster can be found in our guide to ethical investment funds.)

Most of the providers that we’ve covered offer some range of sustainable or responsible funds, but decoding the policies that lie behind these nice sounding adjectives is often difficult.

‘Ethical’ pensions normally denote funds that have a strict set of investment exclusions – if companies are involved with these activities then the fund will not invest in them. Common exclusions include companies involved with fossil fuels, gambling, tobacco, and deforestation.

ESG investing (Environmental, Social and Governance) has a different focus. It is less about avoiding investment in problematic companies out of principle, and more about avoiding problematic companies in order to protect portfolios from financial risk. Its advocates claim that ESG investing aligns both financial and ethical goals, but there are some clear tensions that emerge when sustainability is treated not as an end in itself, but as a means towards safer returns. For example, an oil company which ‘performs well’ can have great ESG ratings if it reports well and avoids controversies such as oil spills.

The ESG-tilted ‘sustainable’ or ‘responsible’ plans offered by other providers are not necessarily less ethical, but we were looking for easily accessible and plan-wide policy rather than a reliance on often-opaque ESG ratings.

What we are looking for in green pensions

We want to see:

• all funds within a plan to exclude more than just indiscriminate weapons – a (near) globally accepted investment no-go – and ‘very severe ESG controversies’ in their investment policies
• comprehensive exclusions for companies involved with fossil fuels, deforestation, and human rights abuses

We gave a Product Sustainability mark to the ethical pension options of Nest, PensionBee (named as their ‘Impact Plan’), Aviva, Aegon, Scottish Widows, and Wealthify for meeting these criteria. They are labelled with [E] on the score table. If a pension plan was labelled as ethical but lacked transparency or detailed exclusion criteria then we did not award this mark.

How do pension options compare?

The short but unfortunate answer is that there is no single clear best option that will work for all pension savers.

For workplace pensions, we recommend Nest’s ethical fund for its comprehensive exclusions, developed positive investment policy and best-in-class transparency. The personal pension sector is more complex however, and it so far lacks a Triodos equivalent that combines consumer accessibility with full investment transparency, portfolio-wide ethical policy, and good overall of company practice.

Quite a few of the ‘sustainable’ or ‘responsible’ pension plans that we’ve surveyed look problematic. Legal & General, for example, manages a ‘Future World ESG fund’. At the time of writing, this fund named Shell and Unilever amongst its top 10 holdings. The People’s Pension’s ‘Ethical Fund’ appears, despite its name, to be a fairly standard ESG fund: it listed Amazon, Nestlé and Microsoft in its top 10 holdings at the time of writing.

This blurring of terminology has the potential to be highly misleading. Few would associate Shell with sustainability or Amazon with ethics.

ESG may have a role to play in improving investment standards, but it is no silver bullet and cannot be relied upon if you want to ensure that all of your pension is invested in line with your own ethics. ESG funds ought to be tilted towards sustainable companies and away from fossil fuel companies, but most lack the ‘hard’ investment exclusions that would guarantee this.

If exclusions are a priority, the easiest option might be to choose a pension provider that offers an actively managed ethical pension plan. App-based upstart PensionBee’s ‘Impact Plan’ is a good example, with fully transparent exclusion criteria alongside an inclusion policy focused on companies addressing major social and environmental challenges.

The table below shows just some of the ethical funds offered by each provider to give an idea of the choices available and terms that pension providers use.

Ethical workplace pensions

Automatic enrolment into a workplace pension has now been in place for a decade, and it’s proved highly successful. Total UK workplace annual contributions have since increased by over 50% in real terms. But has this shift in responsibility for setting up a pension scheme made us feel less responsible for how our pensions are invested?

Most employers will enrol their staff in their provider’s default funds, which tend to have no, or pretty minimal, ethical exclusions. Of the providers that we surveyed, only Nest and Legal & General stood out for having some detailed ethical policy that covered their default funds – most pension providers limit all discussion of ethics to their ethical options.

Generally, default fund options will only exclude investment in controversial weapons, such as landmines and cluster munitions, so providers are free to invest in other sectors with damaging environmental and social impacts. We highly recommend that employees ask their employer to switch their pension plan to an ethical fund if it is not already in one.

All of the workplace options that we’ve looked at offered some ethical or ‘sustainable’ or ‘responsible’ pension funds, so moving to one of these should be the first priority. Employees may also want to consider asking their employer to switch the whole company’s pensions onto a more ethical provider. Any UK employer can use Nest due to its public service obligation.

Which pension providers offer workplace and personal pensions?

Pension inequalities

Like any financial product, pensions link into the wider economy and wider society in complex ways. Obvious ones include the interactions between pensions, investments and climate change. But pensions also link to wider debates about fairness in the UK labour market and to inequalities across issues like wealth and gender.

According to the ONS, the top 10% of pension savers hold more private pension wealth than the rest of the population combined. Less than 1% is held by the bottom 50% of savers. The tax relief offered on pensions makes them a great investment option, but it also acts essentially as a giveaway to the ultra-wealthy.

Libby Wallis, of the Fair Pensions For All campaign, told us that

“some of the UK’s most financially-at-risk groups – including divorced women, people from ethnic minority backgrounds and disabled people – have suffered a decade of decline in their private pension income. These groups have retirement incomes up to 80% less than the UK average and, in some cases, savers are reaching retirement with private pension incomes of just £2,850 per year.”

Find out more about the Fair Pensions For All campaign on their website.

The gender pensions gap in the UK is massive: around double that of the gender pay gap. The average male pension pot was worth £205,800 in 2021, compared to just £69,000 for women. Workplace pension saving was simply not designed for people who take significant career breaks, have multiple or part-time jobs, are self-employed, or move frequently between jobs.

It is important also to remember that pensions in the West are a privilege, often funded by investments in companies based all around the planet. Many of the companies that we write about are building value for you by exploiting workers elsewhere. These workers are unlikely to have any similar promise of later-life stability.

Sharia pension funds

The world of Islamic banking has long placed rules on what practices are permissible or halal. Regarding investments, there are two key criteria.

Firstly, as interest is not permitted under Sharia law, any return on investment must be from the actual share of profits made by a company or fund, rather than a fixed return based on charging interest.

Secondly, investments must not be made in companies whose activities do not comply with Sharia law, such as those manufacturing, selling, or offering alcohol or haram meat (e.g. pork), or those involved in gambling, night club activities, or pornography. The second criterion is therefore much the same as the negative screening process applied by many ‘ethical’ or ‘sustainable’ funds.

Most of the providers in the score table offer access to Islamic funds, with many offering the HSBC Islamic Global Equity Index fund. HSBC scores very poorly for ethics in our banking reports and we would not recommend this option.

Why are animal rights issues so absent from pension policies?

Our ‘investment policy and transparency’ rating was looking for pension providers to have some portfolio-wide policy covering animal rights issues, but we found this to be almost entirely absent from the pensions sector.

A few of the providers’ ready-made ethical plans excluded cosmetic animal testing (Nest, Aegon, Scottish Widows), and Nest claims that its ethical fund aims to invest in companies that ‘meet animal welfare codes of practice relevant to their industry’, but this feels somewhat vague.

The absence of animal rights concerns from pensions debates is highlighted by an ongoing campaign by World Animal Protection, which calls for UK local authority pension funds to divest from factory farming.

Lindsay Duncan, World Animal Protection’s farming campaigns manager, told us: “World Animal Protection’s report last year found that, in total, UK local authority pension funds hold £238 million of investments in industrial livestock companies, and we are calling on local authorities to stop investing in these factory farms. The report also showed that just 10 local authority pension funds hold almost half of the total UK local authority investments in industrial livestock companies, worth £110.6 million."

You can find out how much your local authority invests in global industrial livestock companies by entering your postcode into the World Animal Protection website. They also provide guidance on contacting your local councillors asking that they drop investments in animal cruelty and climate destruction.

You can read more about World Animal Protection’s work, and get involved with their campaigns, on their website. We also have a separate article on what factory farming is and why it's harmful.

Apps and websites for pensions

The fintech (financial technology) boom of the last few years has promised to make investing more accessible to the non-financial world. While it is generally wise to take the promises of tech-centric disruptor companies with a few spoons of salt, there is a genuine sense that the pensions industry was in need of a shakeup.

Penfold uniquely uses its app to encourage pension savers to engage with the companies that they are part-investors in. Its ‘Have your Say’ dashboard, powered by Fintech firm Tumelo, shows what will be discussed in companies’ upcoming annual general meetings. Users can then tell their fund managers through the app how they think they should vote, so can take a stance on issues that are important to them. Penfold’s fund managers take this into account and report back through the dashboard on how they voted.

Circa5000 is an 'impact investing' company that promises “growth for you and the planet”, enabling savers to customise their own pension portfolio from within its app. This doesn’t give the total control offered by SIPPs, but users can instead build their portfolio from a balance of “clean water, cyber security, digital learning and EdTech, sustainable future of food, pharma breakthrough and global clean energy” focused funds.

Penfold and Circa5000’s approaches seem to represent the positive wing of the fintech boom. Rather than disrupting for the sake of disruption, the technology here seeks to improve consumer literacy around the investment process and encourages savers to engage constructively with their pensions. These moves to demystify investment and empower individual savers are welcome.

How do pension providers score on ethical and environmental issues?

Below we have highlighted how the pension providers rate in our system for important issues like climate change, transparency and investment in unethical practices such as armaments.

Carbon reporting doesn't equal meaningful carbon action

Financial companies’ climate reporting has improved since our last round of research, if only in the sense that they’ve made their reports longer and more detailed. Financial companies are clearly keen to demonstrate their awareness of climate issues, and these reports occasionally read like university applicants’ personal statements, attesting to how ‘passionate’ and ‘driven’ these companies have become (apparently just over the last couple of years!).

However, just as the enthusiastic undergraduate application may omit tendencies towards procrastination and inaction, so too does the zealous rhetoric of financial companies.

No providers were awarded our best rating for carbon reporting, and just one – Circa5000 – scraped a middle.

We have seen some industry-wide positive steps, with investment companies increasingly acknowledging some responsibility for the emissions of the companies that they invest in, but concrete commitments to science-based emission targets were, at best, still under development.

Investment policy and transparency

Pensions are offered by a broad range of company types, but they share a responsibility to invest your pension responsibly and transparently. Our newly revised investment transparency rating attempts to capture this complexity.

In order to get a best rating, providers must have a detailed investment policy that covers all assets under management. We were looking for companies to have company-wide exclusions – that is, not just for their ethical or sustainable funds. Exclusions should include companies involved with particularly damaging sectors: fossil fuels, indiscriminate weapons, deforestation, and human rights abuses.

We were also looking for companies to disclose their investments, and to disclose how they vote in the shareholder meetings of their investee companies. All of the pension funds that we looked at disclosed their top 10 holdings online, and these can generally be found easily through an internet search. Some, like Nest, Penfold, and Legal & General go a step further and allow customers to see all the companies that their pension is invested in.

Amongst pension providers, only Nest and Legal & General met all of these criteria. Whilst these companies’ investment policies did still contained gaps, they were significantly more developed than those of their competitors.

Arms and military supply

Most pension providers explicitly exclude investment in what they generally label as ‘controversial’ or ‘indiscriminate’ weapons. These generally include cluster munitions, biological and chemical weapons, and anti-personnel landmines. Nuclear weapons are noticeably absent from these lists, despite being both indiscriminate and controversial.

Even Nest, does not exclude nuclear weapons from its default funds, arguing that ‘a policy on nuclear weapons divestment is not precise and would exclude some of the largest companies in the aerospace & defence industry’.

Excluding aerospace and defence companies sounds like a positive move to us, but savers will need to select Nest’s Ethical Fund if they too wish to avoid investments in nuclear arms.