Right on the Money: What’s in your pension?

For many people, a pension is one of the biggest financial assets they’ll ever have. So how do you ensure it invests in the things you’d want it to? In his monthly column on green and ethical saving and investing, chartered financial planner Tony Fuller of Path Financial looks at how to match your retirement pot with your principles.

For many of us, our pension is the biggest investment we have, and the one we engage with the least. While we might carefully choose an ethical bank account or avoid companies that clash with our values, our pension savings often sit ignored in the background, invested on our behalf with little scrutiny.

Given the scale of pension assets, and their role in funding the global economy, this matters hugely.

How much influence do we actually have over where our pension money goes? And does it differ depending on the type of scheme we are in? Let’s consider by looking at the issue of fossil fuels.

Defined Benefit vs Defined Contribution: who gets to choose?

The first thing to understand is the difference between Defined Benefit (DB) and Defined Contribution (DC) pensions.

If you’re in a DB scheme, often found in the public sector, your retirement income is based on your salary and length of service. The investments sit behind the scenes and are controlled by trustees.  This means individual members usually have no direct say over where the money is invested.

Many of these schemes, including some locally to Lewes, have come under sustained pressure from campaigners to divest fully from fossil fuels (as well as other ‘unethical’ investments such as arms, tobacco or companies involved in child labour). Despite some progress, many schemes still hold oil and gas investments. They usually argue that these companies remain good investments and they prioritise their duties to pay pension promises to members over anything else.

This is understandably frustrating. DB schemes do sometimes respond to collective pressure though. Member activism, public scrutiny, and political pressure are often the only levers available.

DC schemes are different.

In a DC workplace or personal pension, your retirement pot depends on how much is paid in and how the investments perform. Crucially, you can often choose how your money is invested, at least to some degree.  Having said that you should really consider taking financial advice if you are going to pick your own investments.

The fossil fuel dilemma: profits vs principles

One argument often used by pension trustees is that oil and gas companies have continued to deliver strong returns, especially in recent years of energy price volatility. From a purely short-term financial perspective, that’s true.

But even setting aside values for a moment, pensions are long-term investments and you cannot buy into that past performance which has already happened. Climate change, regulation, stranded assets, and shifting energy systems all pose real financial risks to fossil fuel companies over the decades ahead so there’s no guarantee investing in their stock will continue to be good financially either. What looks profitable today may not be so attractive over a 20- or 30-year horizon looking forward.

There’s also a deeper question: what kind of economy are our pensions helping to build?

For many savers, the idea that their retirement security is tied to activities driving climate breakdown feels increasingly uncomfortable, particularly when alternatives exist.

Green pensions

If you’re in a DC scheme or personal pension, the level of influence you have depends on the options your employer or provider offers. Some schemes now include:

• Ethical or ESG-screened funds (ESG stands for ‘Environmental, Social and Governance’)
• Explicit fossil-fuel-free funds
• Climate-tilted or Paris-aligned strategies (i.e. aligned with the international treaty agreed in Paris in 2015 to keep average global warming within 1.5 degrees)

However, not all “green” funds are the same. Some simply avoid the worst offenders, while others actively invest in solutions like renewable energy, energy efficiency, and sustainable infrastructure.

It’s worth digging a little deeper than the fund name. Ask questions such as:

• Does the fund exclude fossil fuels entirely?
• Does it invest in renewable energy like solar and wind or just “less bad” companies?
• As a shareholder, how does the fund manager vote on climate resolutions at companies’ annual general meetings?

You can get answers by looking at the factsheets, literature and online web content for your scheme’s funds. if you’re in a pension scheme provided by your employer, put these questions to the administrator.

Before making any changes to how your pension is invested you should really also consider the financial impact of changes you make.  Are the investments still suitably diversified?  Is the risk level right for you, your objectives and your investment time horizon?  Consider taking financial advice unless you are really sure.

Progress among employer pension schemes

There’s growing momentum among employers to offer more responsible pension options, driven by employee demand and climate commitments. Some employers now default staff into funds with stronger climate credentials, while others allow switching into dedicated ethical options.

That said, progress is uneven. Many workplace schemes still use default funds that track mainstream stock markets, meaning significant exposure to fossil fuels remains the norm. Again, the factsheets and information provided about your pension funds should allow you to check how they invest.

Change tends to happen when employees ask questions. Even a single email to HR can prompt a review, especially when linked to wider organisational climate goals.

Pensions as a form of climate action

It’s easy to feel powerless when dealing with something as complex and opaque as pensions. But whether through campaigning for divestment in DB schemes, choosing better options in DC schemes, or nudging employers to do more, pensions are an often-overlooked lever for change.

Aligning your pension with your values won’t solve the climate crisis on its own — but given the scale of money involved, it’s one of the most impactful financial decisions many of us can make.

And as with so much climate action, progress comes not from perfection, but from asking better questions and refusing to accept “that’s just how it is” as the final answer.