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Is it time for pensions to go vegan?

Pensions & benefits Investment Responsible investment
Laura Myers Partner and Head of DC

The 3rd of January 2020 was the day when ethical veganism was lawfully recognised as a philosophical belief – and ruled worthy of protection under the Equality Act 2010.

This landmark ruling, which fell during ‘Veganuary’, involved a DC scheme member claiming unfair dismissal after disclosing to other employees that the scheme’s default lifestyle fund invested in companies that are involved with animal testing. It highlighted that members may not understand how their pension pots are invested and, if they are told about their investments, may be unhappy with what they learn.

This case shines a light on the rise of more socially conscious consumers and the challenges it presents for pension trustees and providers.

The Vegan Society claims that the number of vegans in Great Britain quadrupled between 2014 and 2019 and now account for 1.2% of the population. The trend shows no sign of abating, with vegans and vegetarians set to make up a quarter of the British population by 2025. Vegans make choices around the food they consume and the clothes they wear, so should they also be able to make choices around how their pension is invested?

Even if this is desirable in theory, in practice it can be hard to offer pension scheme members these choices. Some ‘ethical’ pension funds restrict investments using animal testing and animal welfare criteria, but not all do, and the way the restrictions are defined may not go far enough for strict vegans. However, solutions may be on the way.

The world’s first Vegan Fund was launched in September 2019 and is designed to address the concerns of vegans, animal lovers, and environmentalists. It tracks the US Vegan Climate Index which is constructed by excluding stocks from the Solactive US Large Cap Index that do not meet particular vegan and ethical guidelines. From approximately 500 stocks in the parent index, roughly 280 stocks remain.

Companies are excluded from the index if they derive more than a minimum proportion (described as ‘generally’ 2%, but the extent of that flexibility isn’t clear) of their total revenue from products and services directly related to one or more of the Prohibited Areas within Animals, People and Planet. That means a company with annual revenue of £100bn is allowed to make £2bn of non-vegan-friendly revenue and still be included in the index. This definition is likely to raise some eyebrows.

Whilst the vegan judgement doesn’t have any direct implications for pension schemes, it does highlight the importance of communicating investment options clearly to members. As society becomes increasingly socially conscious, there is likely to be more intense scrutiny around how and where people’s pensions are invested across the ESG umbrella. Members may find that their pension is invested in companies they don’t approve of – even if they’ve selected the ‘ethical’ option. Trustees and pension providers could face criticism if members feel they have been misled. They could also face demands for a wider range of self-select investment options.

Many pension schemes offer a selection of funds for members to express their religious or other beliefs. Could it soon be the case that the vegans within our DC schemes demand the same options?

Currently, there aren’t any vegan funds available on traditional DC platforms in the UK and therefore vegan members do not benefit from these opportunities. However, as the DC market matures, and high-profile cases such as this spark curiosity amongst members as to where their money is held, what better way to engage members than to offer funds that allow members to express their beliefs?

In the meantime, pension trustees and providers should ensure they are comfortable that the exclusions applied in their ‘ethical’ fund are appropriate and that they’ve communicated them sufficiently to the members.