• Bhavana Poosarla

Sustainable Pensions: How Plan Beneficiaries are Shaping the Future of Pension Systems

Updated: Mar 6

Many institutional investors are addressing global issues by making allocations into ‘sustainable investments’. Sustainable investing is an umbrella term referring to a spectrum of investment approaches such as ethical screening, ESG (Environmental, Social, and Governance) investing, impact investing in alignment with the Sustainable Development Goals. Pension funds are one of the asset owner groups taking a plunge into the domains of sustainable development. USSIF Foundation reported that, as of 2018, public pension funds accounted for more than half of the $8.6 trillion worth sustainable, responsible and impact investing assets that were managed on behalf of US-based institutional investors¹.


Pension fund asset managers are bound by their fiduciary responsibility to act in the best interests of their plan participants. Over time, these beneficiaries have grown outspoken about aligning their finances with personal values. Most recently in Australia, Mark McVeigh, a 24-year old council worker, took his pension provider REST (Retail Employees Superannuation Trust, $57 billion) to court over limited disclosure on climate-change-related risks².


On the other hand, legislative bodies are giving plan beneficiaries a voice. In 2017, the EU High-Level Expert Group on Sustainable Finance (set up by the European Commission) advised pension funds to consult beneficiaries on sustainability preferences and accordingly update investment strategies³. Delaware 2018 Trust Act allows trustees to consider beneficiaries’ values in case the latter wished to invest in sustainable funds in line with environmental, social, or governance beliefs.


These developments have opened up a conversation in the pension industry about what beneficiaries want, whether and how to incorporate their (sustainability) preferences into investment processes without compromising on fiduciary duty.


Pension plan participants increasingly prefer sustainable investments

Over the past few years, several institutional investors and academics have begun analysing beneficiaries’ preferences regarding sustainable investments. Excerpts from some surveys below:

  • In a 2015 academic study, 49% of 1119 Swedish pension plan participants believed that asset managers should consider social, environmental, and ethical aspects of investments, even without an increase in returns. 80–90% of respondents preferred to avoid investments in ‘unethical’ companies.

  • In Natixis’s 2016 Survey of US Defined Contribution (DC) Plan Participants, 74% of the 951 respondents wanted to see more socially responsible investments in their retirement plan offering.

  • Big Society Capital’s 2017 survey of 1500 UK employees with a DC pension found that 46% of employees wanted their pensions invested in organisations that reflect their social and environmental views.

  • In 2018, Bauer et al. in cooperation with Dutch DB (Defined Benefit) pension fund Pensioenfonds Detailhandel reported that 67% of 3256 Dutch pension participants surveyed favoured sustainable investment of their pension savings. Participants responded similarly in both hypothetical and real investing scenarios. Moreover, 42% of surveyees were willing to give up financial returns to invest more sustainably.

  • In a 2019 academic study conducted in the Netherlands, three-quarters of 2486 pension plan participants preferred sustainable investment of their pension funds, even in exchange for higher premiums or lower benefits.

What are the factors driving this inclination?


The gradual shift from DB plans to DC plans shows that — besides pension funds trying to shift liabilities — beneficiaries are willing to take investment risk and make investment decisions based on their moral values. This change might be in contradiction with the traditional neo-classical finance concepts which assume that investors are solely worried about profit maximisation and behave rationally at all times. However, the happening sounds plausible under a behavioural finance perspective, where people’s desire to be socially responsible is deemed ‘normal’¹⁰.


Preferences for sustainable investments are heterogeneous¹¹ and are influenced by a variety of factors.


  • Socio-demographic characteristics: Women and millennials have demonstrated a higher preference for sustainable investments in studies conducted by Schroders¹² and Calvert Investments¹³.

  • Confidence: Individuals might have picked sustainable funds because of their belief in the effectiveness and authenticity of such funds¹⁴.

  • Attitudes and norms: Countries exhibiting typical sustainable behaviours might be more likely to invest in sustainable funds¹⁵.

  • Political preferences: A Dutch study found that people opted for sustainable investments had mostly voted for sustainability-oriented political parties¹⁶.

  • Standard of living: Individuals with relatively high wealth might be willing to take more risk with their investments.


However, despite having good intentions, pension plan participants might still need hand-holding from their trustees. Many pensioners don’t necessarily possess the required financial literacy to translate their preferences into risk-return-appropriate investment decisions¹⁷.


Pension funds are listening to their beneficiaries


Both DC and DB pension funds are beginning to look at beneficiaries’ non-financial preferences alongside financial ones. On a business-level, this will also be advantageous for pension funds in terms of customers retained in a competitive market.


  • In 2006, Australian superannuation fund Christian Super heeded to its beneficiaries’ interests and ventured into impact investing. A carve-out portfolio approach helped the firm develop in-house expertise and build a business case for impact investing¹⁸.

  • A 2019 academic study found that 31 US public pension funds incorporated CSR (Corporate Social Responsibility) into their investment choices in order to align with beneficiary preferences and moral values¹⁹. This alignment was easier as public pension funds are typically subject to less stringent regulations than their private counterparts.

  • Dutch pension fund PGGM established its responsible investment beliefs and foundations following consultation with its clients. Its overall ‘responsible investment framework’ outlines material themes such as climate change, healthcare, and food security which matter to its clients and beneficiaries²⁰.

  • Swedish pension fund Alecta surveyed its 2.5 million pensioners on their responsible investment preferences and found that 75% wanted to manage money responsibly. The pension fund aims to make more SDG-aligned investments, which it believes, help manage long-term risk²¹.

The rising interest from beneficiaries and institutional investors is timely in the face of the sustainability revolution. The adverse effects of climate change, inequalities, and energy poverty are loud and clear, and continuing with a ‘business-as-usual’ scenario will not take us far.


As one of the largest and fastest-growing impact investment capital providers²², pension funds can leverage the vast pools of money to deliver positive social and environmental impact at a scale. It will do pension funds good to adapt to the changing environment, build expertise, and boost investments to mainstream the fast-approaching 2030 SDG agenda.


Note: Views expressed are my own.


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