In partnership with the University of Glasgow and University of Strathclyde, Fintech Scotland released a
report on sustainable financial products and UK pension schemes last month.
This article covers the findings of the report and their significance to the UK economy and sustainable finance initiatives.
How is ESG being integrated into current pension schemes?
UK pension schemes are complex structures that are shifting in importance and value in the current volatile economic market.
The report from Fintech Scotland outlines how sustainable product designs are becoming more significant in the UK’s Defined Contribution pension schemes, and how sustainable investment products are growing in popularity and frequency in the industry.
The two main pension scheme structures in the UK are Defined Contribution (DC) and Defined Benefit (DB). DC could be a workplace pension or a private pension, and its value is defined by the amount paid in and
how well the investments perform. DBs are workplace pensions arranged by the employer, which are usually based on the pensioner’s salary and how long they have worked for their employer.
The Fintech Scotland report finds that more asset managers and pension trustees are planning to integrate environmental, social, and governance (ESG) considerations into pension investments, due to growing demand. Other pension schemes, Standalone Schemes
(which can be hybrid DC and DB schemes such as the Universities Superannuation Scheme) and Government-Connected Schemes (such as the Local Government Pension Scheme) have been leaning towards green bonds and sustainable investments, aiming to reduce risks
associated with climate change.
Institutionally-Connected Schemes, such as those with big banks like HSBC and NatWest, are a step ahead in introducing green finance products into pension schemes – having responded to regulatory pressure and demand.
Fiduciary Duty of pension schemes incorporating ESG factors depend on the mission of the pension scheme (for example to gain benefits) and investment values. Trustees and fund manager positions vary on green investments in pensions, though the UK government
and Pensions Regulator has required pension schemes to report financial risks in relation to climate change as of 2024.
What are the latest developments in UK pensions?
The
Pensions Dashboard that is currently under development will change the landscape, specifically regarding transparency and accountability. Fintech firms can play a significant role in introducing more opportunities for sustainable products in pensions.
This increase in transparency gives users more control over their pension and what they are investing in. The Dashboard also offers significant potential for green investment by integrating ESG metrics – enabling pensioners to opt for sustainable products.
The Pensions Schemes Act 2021 and Pensions Dashboard Regulations (Amendment) 2023 outlined the requirements for pension providers to connect to the dashboards, while the Money and Pensions Service (MaPS) and
Pensions Dashboards Programme drafted standards for the new ecosystem that were approved last month. The deadline for firms to connect to the digital pensions dashboard is 31 October
2026.
What challenges and solutions are facing sustainable financial products in pension schemes?
The challenges facing this transition include the cost of sustainable products; regulatory constraints in which sustainable investments can conflict with fiduciary duty, lack of understanding when it comes to sustainable finance, and greenwashing and greenhushing
concerns.
The report points to three key developments that alter how sustainable financial products will operate in pensions:
- The standardisation of ESG metrics will make it easier for pension schemes to adopt ESG criteria, and there is already progress on this front in regulating ESG ratings within the European Union.
- The Pensions Dashboard and increased involvement of fintech firms will make managing pensions easier, more accessible, and more transparent.
- Legislative support from regulators in adopting ESG factors and considering climate change risks in investments is on the rise.
Underpinned by increased demand from pensioners, the Fintech Scotland report underlines a clear path forward for sustainable and green financial products to be integrated into UK pension schemes.