Romi Savova is the chief executive of PensionBee, which was founded in 2014
Investors keen to ditch big oil and gas companies from their pension funds have the option to go fossil fuel free from as early as next year if they sign up their savings to a brand new tracker fund set for launch by PensionBee.
The online pension platform has teamed up with investment giant Legal & General to develop an index that completely excludes companies that continue to extract oil and gas, even after publicly committing to ‘reducing’ their carbon emissions.
Existing PensionBee customers are now being asked if they want to commit their pension pots to the new Fossil Fuel Free plan.
The company needs to raise a collective £100million to deliver the plan at an annual fee of 0.75 per cent, which chief executive Romi Savova says she hopes will be before the end of 2020.
They seem on track. A little over a week since customers were first notified of the new plan, funds committed have passed £33million.
This is Money spoke to Romi to look under the bonnet of the Fossil Fuel Free plan, why it’s being launched and find out why existing – and eventually, new – customers should ‘commit’.
What is the Fossil Fuel Free plan?
PensionBee’s latest venture is a new fossil fuel-free plan in partnership with Legal & General which gives consumers the choice to exclude certain companies that do not meet their ethical investing requirements from their pension.
The Fossil Fuel Free plan needs £100million committed by existing customers to launch
It is one of the UK’s first mainstream private pensions to completely exclude companies with proven or probable reserves in oil, gas or coal and tobacco companies, manufacturers of controversial weapons, nuclear weapons and persistent violators of the UN Global Compact.
Unlike the Future World fund, which was introduced to PensionBee customers via its Responsible plan in 2017 and seeks to engage certain companies to get them to change their business practices and carbon footprint over time, the Fossil Fuel Free plan excludes them completely from the outset.
It also invests in companies that are aligned with the Paris agreement, a set of standards agreed within the United Nations Framework Convention on Climate Change, dealing with greenhouse gas emissions mitigation, adaptation, and finance.
The new Fossil Fuel Free fund will be a hybrid of traditional passive investing – ie. tracking an index – but with the type of stock-picking usually only accessible via a niche actively managed ESG provider.
Romi says: ‘The mainstream passive investing world has historically shied away from offering a product of this type because they didn’t believe there was big enough demand for it. We hope our customers can prove them wrong.’
Why is PensionBee launching fossil fuel free?
Last year, PensionBee customers in the Future World plan, also managed by Legal & General, increasingly expressed a desire to completely remove certain stocks, due to a belief that shareholder engagement is ineffective.
Customers were questioning whether oil company Shell’s business model in particular, was transitioning to a low carbon economy quickly enough to warrant continued inclusion in the plan. Since then, there have been further requests to remove all fossil fuel and tobacco companies.
In response, earlier this year PensionBee invited all customers in the plan to take part in a survey about their investments in high carbon emitting and tobacco companies.
The results found many customers were concerned that some of the fund’s holdings have been slow on the uptake to reduce their carbon emissions and that engagement is not – yet – enough for them.
PensionBee’s survey found a mix of views when it came to investing in oil companies but a sizeable amount wanted high carbon emitters completely removed from their portfolios
Romi says: ‘We found there are two camps when it comes to responsible investors – those who want to see engagement with certain types of companies, and those who want to exclude them altogether.
‘We wrote to Legal & General asking why Shell was still in the Future World fund and they said they would be keeping it because its core philosophy was to keep engaging and make a change.
‘I do believe in activism but this approach isn’t for everyone and many of our customers have a strong desire to remove oil and related companies from their portfolios entirely. So we decided to make a new fossil fuel free plan and index.’
The survey and its results were produced in February 2020, well before the coronavirus pandemic fully took hold and anyone had seen the impact the reduction of oil consumption had on the environment and the stock market – clearer skies and price slumps.
Romi adds: ‘Some people believe oil has no place in world of tomorrow and so would prefer a fund that excludes it. We found they are also happy to sacrifice economic return to invest in a way that meets their ethics and values and beliefs.’
Not everyone is of the view that excluding fossil fuels means sacrificing financial returns however. Indeed, there are those who argue not excluding them is the thing likely to drag on returns in the future.
PensionBee’s survey found a large portion of its customers were happy to sacrifice economic return to invest in a way that meets their ethics and values and beliefs when it came to tobacco
How much will it cost?
As well as doing its bit for the environment, PensionBee’s new plan is a means for investors to invest ethically in a more cost-effective way than previously available.
Romi says private pension savers would normally have to find a specialist ESG fund from an active manager to offer this level of discretion over where their money is invested.
‘That can often be very expensive, complex to understand and come with additional risks,’ she adds.
‘If you look at the work of ethical investing, usually these types of pension products are actively managed. Active management means that your money managers are picking stocks on a weekly or monthly basis, and this can be very expensive.’
The Fossil Fuel Free plan benefits from a more passive approach, which is generally more cost-effective than actively managed fund strategies.
PensionBee customers pay an annual fee between 0.50 per cent and 0.95 per cent, depending on the plan they choose. A portion of the annual fee is deducted on a daily basis.
Its proposed annual fee of 0.75 per cent is cheaper than PensionBee’s Responsible – Future World plan which charges 0.95 per cent annually. The cheapest plan currently available with PensionBee is with its Tracker fund with a yearly fee of 0.50 per cent.
So how does this compare over the long-term? An investor in the Tracker fund with an initial pot of £10,000 and investment growth of 5 per cent, would expect to see their pension worth £46,673 after 35 years.
Meanwhile an investor in the new Fossil Fuel Free plan with the same opening balance and investment growth but an annual fee of 0.75 per cent would be left with £42,920 at the end of 35 years.
This is a very simplified cost difference of £3,753. But it’s not necessarily telling you the whole story – contributions affect what your pot will eventually be worth, but so do where returns come from, which companies pay dividends now versus in the future and the cost of reinvesting profits to reposition a company for the future.
Many argue that investing in fossil fuel-free companies will end up being the future of investing and returns will more than offset the charges. It’s impossible to know this until the time comes.
Becky O’Connor, head of pensions and savings for Interactive Investor, says investors shouldn’t have to sacrifice their financial wellbeing to do ‘good’ and when it comes to returns, she believes there are no trade-offs from investing in fossil fuel free companies.
She adds: ‘Lots of investments in this space have done well. We don’t know what they will do in 30 years but if it continues in the same direction then there is no reason that should be the way it goes.
‘When transferring pots just make you sure you are doing the right thing for yourself financially. Think about costs and charges and make sure what you are moving to isn’t poorer value than what you are moving from. Or if it is, will the potential for higher returns justify it?’
Like the Future World fund, the Fossil Fuel Free plan invests in major international companies, but these will have a proven track record of adjusting their business model and operations to prepare for climate transition.
Currently the fund invests in approximately 1,295 companies with its top 10 holdings including the likes of Microsoft, Apple, Amazon, Home Depot and Samsung.
Romi says customers will be regularly informed on where their money is going what good it is doing, and most importantly, what it’s returning.
She added: ‘We inform customers monthly on significant engagement and divestments from the Future World plan along with quarterly updates on notable contributors to performance. We will do the same for the Fossil Fuel Free plan.’
The fund will passively track the FTSE All-World TPI Transition ex FF ex Tobacco ex Controversies index, which was specifically created for PensionBee’s Fossil Fuel Free plan, as part of a new Paris-aligned index series.
Once the excluded stocks have been removed from the universe, the index combines FTSE Russell and TPI analysis on company exposure to five climate considerations: green revenues, fossil fuel reserves, carbon emissions, management quality and carbon performance assessments.
A Paris-aligned index helps to track companies which have adjusted their businesses in preparation for climate transition and identify those that still have high carbon emissions or display poor management when it comes to climate governance.
The Fossil Fuel Free fund will invest in major international companies with a proven track record of adjusting their business model and operations to prepare for climate transition
The main thing investors will be asking is can excluding such companies realistically make a difference to their pockets.
Oil and gas companies as well as tobacco stocks have historically been big dividend payers in the UK, with Imperial Brands, BP, Shell and British American Tobacco among the top ten best-yielding UK stocks in 2020 according to CMC Markets.
This year has seen a huge decrease in market value of oil and gas giants, who have lost more that £324billion this year according to Bloomberg data. BP, Shell, Repsol and Eni have all lost around 60 per cent in their value, largely due to a fall in oil consumption.
Romi says: ‘Many savers are looking at this and forming opinions about whether they think these stocks will be profitable again as we come out of the pandemic.
‘Many people believe the oil industry has no future and they want to capitalise on that by investing in this fund.’
But putting cancelled dividends in the face of the coronavirus aside, those high payout rates are not guaranteed for the long-term future, especially as the push for a permanent, renewable energy sourced way of living grows stronger.
Moving to fossil fuel-free investing may mean forgoing dividend income in the short term but making more money over the long term as the world progresses.
Becky O’Connor continues: ‘I don’t think investors should expect to sacrifice returns by investing ethically. The world has moved on enough that that argument doesn’t really hold anymore.
ii’s Becky O’Connor says investors shouldn’t sacrifice returns by investing ethically
‘Yes, oil and gas have been decent dividend payers but the beauty of renewable energy is the way it generates long-term stable fairly dependable returns.
‘If you have a renewable energy development, say an offshore wind farm, then you know what that revenue is pretty much going to be over the next 20 to 30 years.
‘You know how much wind is there, how much electricity it generates, and what the fixed price of that electricity will be.
‘Institutional funds have been replacing oil and gas with renewable energy companies for quite a long time now because of their long-term dependability.’
Many oil and gas companies have committed to developing their renewable energy programmes by 2050 and Shell specifically aims to reduce the carbon intensity of its energy products by 30 per cent by 2035 and by 65 per cent by 2050.
A spokesperson for the company told This is Money: ‘The energy system is changing and Shell is playing its part.
‘We have set an ambition to be a net zero emissions energy business by 2050, or sooner, which means moving in step with society to address our own emissions and help customers to reduce theirs.’
Investors should also consider that returns may well be compromised as companies transition into a completely new business model.
What else should you consider?
Even if PensionBee’s Fossil Fuel Free fund or putting together your own ethical investing portfolio sounds desirable, customers should consider if it’s worth transferring their pension pots.
The impact of charges, fees and potential returns are key, but customers not already with PensionBee should also look at what they might be giving up in order to transfer.
If you are transferring and consolidating former workplace pension pots, find out if they are defined contribution or defined benefit schemes.
The former will have involved you, the employee, paying in a set amount to your pension alongside lower or matched contributions by your employer. The amount payable on retirement is not guaranteed.
But DB schemes are often considered more valuable – and rarely given nowadays – as employees are given a guaranteed annual payout after they retire based on how many years they have worked at a company and what their final salary was.
Giving one of these up could significantly impact how much money you could receive on retirement, not to mention potentially having to pay a usually high fee for making the transfer in the first place.
Becky says rather than moving a DB pot, you’re better off lobbying your provider to reduce their own carbon footprint.
She adds: ‘Some older schemes are not DB but have a DB element so it’s worth getting advice before taking the decision to move your pension.
‘It is easier to move smaller pots, but be cautious of exit fees which will very depending on who the pension is with.
‘If you are currently paying into a workplace scheme, you should strongly consider keeping that going to avoid losing employer contributions. It’s better to just transfer your old pots.’
What are the alternatives?
As PensionBee research states, the Fossil Fuel Free plan is the first of its kind.
To remove oil from your personal pension you would have to use a specialist impact investor or build your own self-invested personal pension to actively pick stocks and manage a portfolio yourself.
Both can come with additional cost and/or risk, especially for a saver who doesn’t have knowledge of how to diversify and minimise fees.
Building your own Sipp, with a platform such as interactive investor, for example, will require the know-how rather than sitting back and letting a tracker fund do the work for you.
For a saver seeking to go fossil fuel-free in the workplace, NEST and some local government pension schemes have made public commitments to decarbonise their portfolios over time.
In most workplace schemes the ethical option will weight towards companies that demonstrate robust ESG scores but not explicitly exclude oil.
ii pension pots go fossil fuel free
New data from interactive investor has revealed its customer’s top 20 most popular ethical Sipp holdings have no fossil fuel company exposure within their respective top ten holdings.
Seven of the top 20 ethical Sipp holdings on the platform are pure renewable energy investment vehicles such as the Baillie Gifford Positive Change fund and the Greencoat UK Wind trust.
Many of the funds, trusts and stocks are fossil fuel-company free by implication, if not by overt mandate, because they are invested in companies focused on environmental solutions.
Examples include Kingspan which provides insulation for energy efficient buildings or Taiwan Semiconductor, which manufactures parts for electric vehicles.
Becky O’Connor, head of pensions and savings at interactive investor, said: ‘There is pressure on large pension schemes to become net zero by 2050 but individual investors don’t have to wait around for the big corporate juggernauts to turnaround: they can set their own pension on course for net zero today if they want.
‘Sipps are wrappers that allow people to choose their own investments for their retirement fund, in the same way you can choose investments in a Stocks and Shares Isa.
‘Our research shows that interactive investor pension customers appear to be taking net zero action for themselves.
If you’re an existing PensionBee customer, you can commit to switch your plan to the Fossil Fuel Free plan on the website today.
New customers need to sign up and commit to transfer into one of the current plans, and can then switch into the Fossil Fuel Free plan.