GSK greens DC equity options
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Global pharma giant GSK is including a 50% carbon tilt in its defined contribution global equity fund and introducing a sustainable equity fund in the self-select range, as well as changing the retirement target of the default fund. Where are DC schemes on the ESG journey – and will they be pushed to consolidate before they can catch up?
The £2.6bn GSK scheme last changed its DC default fund’s asset allocation last year, when the trustees decided to rebalance the GSK Lifecycle Fund to contain 65% GSK Equity Fund and 35% GSK Diversified Growth Fund, a shift of 10 percentage points from equities to the DGF.
This year, as well as changing the target of the default fund from annuity purchase to drawdown from 15 July, the scheme is also making changes in the portfolio, with the GSK Global Equity Fund now including a 50% allocation to Legal & General’s Future World funds, which apply a carbon tilt to their index.
In addition, the scheme is adding a new GSK Global Sustainable Equity Fund with a 100% exposure to the L&G Future World funds.
The scheme first adjusted its investment options to the pension freedoms in 2018, when it introduced two new lifecycle options and a new shariah freestyle fund.
What prompted the changes?
The trustees said they decided to make the changes taking into consideration members’ experience of the GSK pension plans, including changes in savings and retirement income habits, wider market data of other pension schemes and the choice of appropriate DC sustainable investment funds.
The trustees conducted a survey on sustainable investments in 2019, but only 104 of 10,509 active members responded. At the time the trustee said that “whilst the results provide some idea of members’ current views, they are not necessarily indicative of the entire population, but did provide some helpful themes which the trustees will continue to build on in future surveys”.
The survey showed that 62% of the respondents had heard of sustainable investment, but only 12% had ever invested. Nearly half (48%) said they would invest in a sustainable investment fund if it were made available, with the majority willing to do so at an additional cost.
Single trust schemes are at varying stages of their sustainability journey, said Niall Alexander, a principal at consulting firm Mercer.
“For some schemes it is a slow burn - they simply tick the regulatory box for now and recognise ESG risks but no additional action yet,” he noted, but added that members are starting to ask questions, while legal requirements are increasing. “What’s considered the bare minimum today will soon be unacceptable,” he said.
At the other end of the spectrum, those leading the charge are implementing climate-related strategies into the default, planning Task Force on Climate-related Financial Disclosures reporting within the coming reporting cycles, and have climate change on their risk register, he said.
“Most schemes we see are somewhere in the middle – they are offering self-select options and/or working on how best to implement sustainability throughout their strategy,” said Alexander, who added that implementing sustainable funds within the default would place a scheme among the leading DC schemes in this area.
Should DC trusts just consolidate?
Earlier this week, the Department for Work and Pensions published a consultation on accelerating DC consolidation of single-trust schemes below £5bn - such as the GSK scheme – which would lead to a more concentrated market, where master trusts with more negotiating power make fewer manager and adviser appointments compared with the current, more fragmented, market, the goal being better value for members.
However, for Alexander, the trust structure does not necessarily reflect how much value members receive. “There are some fantastically well run, well governed, innovative, cost-effective single trust DC schemes out there. Key to success in DC is giving members the best chance of having a good outcome in retirement,” he said. More schemes now target and govern against the scheme’s ability to provide a good standard of living in retirement, using either the PLSA retirement living standards or replacement ratios, he added.
Being on investment platforms helps bring costs down, he advised, and, if the employer is willing to pay for administration, for example, he said member charges can be below what schemes might pay if they consolidate.
"Governing a DC scheme against targets that seek to deliver better retirement outcomes for members in a cost-effective way is very sensible in our view,” he added.
For William Chan, head of DC investment at consultancy Hymans Robertson, the move to more specialist ESG equity products is typical of what DC schemes are doing. “Single trust schemes have made good ground on this journey when it comes to equities, but most schemes have not made progress on non-equity asset classes,” he observes.
Schemes may soon need to consider not just how to integrate ESG but whether their members would be better off elsewhere, as he believes that “there will be a continued push from the regulator for consolidation”.
