How defined contribution (DC) schemes invest has been a topic of much debate with various government consultations threatening change and offering opportunity in equal measure. The master trust sector clearly wishes to be seen to be driving forward the debate, aiming to set the investment agenda and also offer more sophisticated investments to members.

With the news that there is a 66% chance we will pass the 1.5ºC global warming threshold between now and 2027 it is clear we need action as well as debate.

The Aegon Master Trust recently introduced 16 new funds to its range that incorporate various levels of environmental, social and governance (ESG) considerations embedded in their design. Several have a more focused sustainability or climate change objective.

Tim Orton, chief investment officer at Aegon UK, told Pensions Expert: “We’ve redesigned the range to transform it into something that’s sustainability led and come up with a selection that provides members with choice not only across asset classes. This includes a range of different equity building blocks if members want to create their own portfolios, but also fixed income and asset classes with a mixed risk rating across multi asset and real estate.

“We are screening by design, with a couple of exceptions around gilts. We also screen across the majority of the base assets and base funds available, and then offer a range of more sustainable choices where the funds have sustainability built into the core objectives.

“This approach moves away from simply providing a range of vanilla funds with a couple of sustainable choices bolted on, to something that is fundamentally underpinned by sustainability.”

Orton acknowledges that only a small number of members will invest outside the default fund. However, he believes this number is increasing.

The fund update is influenced by Aegon research conducted in summer 2021 that identified a mismatch between intent and action in pension savings by members.

More than half (57%) of the 10,000 consumers questioned said they wanted to invest some of their savings sustainably, but only 31% actually do.

At the same time, half (50%) did not know where they were invested, while almost one third (32%) did not know where they should invest.

Aegon dubbed the lack of investment knowledge and confidence in placing investments the ‘intent vs action gap’.

Orton “absolutely” believes the new fund range will help as an engagement tool to tackle the savings gap, of which the pensions gap is the largest component. “We’ve moved the thinking on and [sustainability is] integral in the whole range,” said Orton. “The fund is not in the range unless it’s got some level of ESG integration and I’ve not seen that anywhere else.”

Changes to the fund range have no impact on the flagship default fund, LifePath Flexi, which already invests 80% of assets in ESG screened indices during the growth stage.

Schemes want more than just sustainability

The pace of change is somewhat commercially led, but as a result of multiple demands from the market.

Paul Bucksey, chief investment officer at Smart Pension, said: “Quality of investment is getting more attention from employers and intermediaries than ever before. Investing responsibly is a priority for schemes. They want their investments to be a force for good.

“Schemes also want diversification, inflation protection and good returns – which they can’t get by just choosing passive equities.”

Private credit has been a very useful asset class for Smart, said Bucksey, with 10% of the default growth fund allocated to it for more than two years. “Net investment returns make a material difference – along with level of contributions – to member outcomes.”

While Aegon is attempting to bridge the gap to encourage individuals to invest sustainably, Bucksey remains focused on the default investment option where most will remain until close to retirement.

“It’s therefore critical that default investment options consider high-growth assets classes.”

Smart says that it has taken a strong line on sustainability, voting and engagement and prefers active stewardship and encouraging companies to “green up” rather than excluding large numbers of stocks.

“We expect to continue to allocate to funds with very strong ESG credentials,” added Bucksey. “For example, 67% of our default is allocated to Article 8 SFDR funds and 33% to Article 9.”

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