All charitable organisations which employ staff will be operating some form of pension arrangements under auto-enrolment obligations.
The types of schemes provided, however, will differ substantially and as a result so will the level of potential influence over progress towards net zero which may be possible.
The vast majority of charity employers will meet their pension obligations by using a defined contribution arrangement which allocates an employer contribution to each individual employee over the period of their employment.
These schemes will be operated under one of two regulatory frameworks:
- A trust-based arrangement – in this type of arrangement the pension benefits are held within a trust and responsibility for them falls to trustees. The vast majority of charities will use schemes defined as master trust where multiple employers can participate in the same scheme under a single trust umbrella.
A number of these schemes are operated on a charitable basis such as TPT Retirement Solutions or People’s Pension, while others will be run by commercial entities. The scheme trustees will ultimately have responsibility for the investment approach used within the scheme and indeed the range of investment funds available to members.
The members would be responsible for selecting from the investment options the trustees provide and, for members who do not make an active selection, contributions will be allocated to the trustees’ chosen default fund. Charity employers therefore can have very little influence over the investment assets. Some larger charities may have their own trust based scheme and the charity trustees or executive may be trustees of that scheme and therefore have more influence, but this is increasingly rare.
- A contract based arrangement – this would be a pension scheme, such as a group personal pension, where the ‘contract’ to provide services is directly between the provider, usually an insurance company or investment manager, and the individual employee. The employer has very limited involvement, mostly restricted to ensuring the payment of contributions.
In this case, the provider would select the funds which would be made available and the employee would chose from these or, if no choice is made, have their contributions invested in the provider’s default fund. Again, a charity employer would have very little to no impact on the assets selected by the provider or the member.
In practice, under both of the above arrangements, the vast majority of employees would not individually select the investment funds they would use and the ‘default option’ would be utilised.
This is an investment choice provided by the scheme which is chosen if members do not specifically make a choice. It is estimated that 95%+ of members use this approach. Clearly, only influencing the asset selections in these funds is likely to make any material difference to net zero objectives.
Trustees and providers will all publish their ESG objectives and therefore their members will have an opportunity to influence these.
Employers may well run pension management committees to encourage employees to engage with and review the operation of their pension scheme. Using this route, charities may have more influence over scheme policy direction. In addition, the employer may be able to run the committees in such a way that assists with net zero objectives, such as holding remote meetings or fewer meetings to cut down on carbon emissions associated with travel.
Some employers may still provide some staff with defined benefit pension arrangements. In the charity sector these tend to be divided into:
Multi-employer schemes – these would be large ‘umbrella’ schemes where a lot of charity employers participate in a single arrangement such as TPT Retirement Solutions or the University Superannuation Scheme. These schemes have trustees who hold responsibility for the scheme’s approach to ESG and should publish their approach/objectives in statements of investment principles (SIPs) and implementation statements.
These schemes can often be run as charities themselves. The trustee would select the assets to be held, based upon professional advice, and the employee and employer would have no real impact on this selection other than in the form of lobbying/influence. Some schemes, such as TPT, have employer committees where the scheme sponsor can look to influence scheme funding and investment, but only to a very limited extent.
Local Government Pension Schemes (LGPS) – a large number of third sector organisations participate in LGPS. These schemes are run by scheme committees or boards. Again, there is little or no potential to influence investment decisions in these schemes by either an employee or a charity participating in them. Further information on LGPS and investments can be found in this House of Commons Library Briefing.
Own schemes – some charities will have their own DB pension schemes. These will usually be legacy arrangements where membership has closed to new entrants or to all future accrual. Like the schemes above, these will also have gatekeepers in the form of trustees and many of these may be independent professional trustees.
Some schemes, however, will retain trustees with a link to the charity sponsor. With these schemes the charity may have more influence over investment policy though still likely to be to a relatively limited extent. To some extent, charities could also influence the governance of these schemes by selecting providers with better ESG credentials and also operating in a more carbon neutral way. Charities may well have membership in multiple schemes which will mean differing opportunities to influence.
All schemes will be subject to relevant regulations on environment, social and governance (ESG) matters, including climate change such as through reporting under the scheme operated by the Taskforce on Climate-related Financial Disclosures.
Read on: Pension schemes - Climate-related risks and opportunities
1. Introduction from Richard Sagar, CFG
2. It's time to get real about ESG
3. Building a net zero strategy
4. Funding on a finite planet
5. Understanding energy consumption
6. Net zero and procurement part 1
Part 2: Steps to becoming verified carbon neutral
Part 3: What are scope 3 emissions? Why account for them?
7. Pensions and net zero part 1
Part 2: Risks and opportunities