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Pension funds should work to encourage better human capital reporting

Diandra Soobiah, Senior Research Analyst at NEST, the UK government’s auto-enrolment pensions provider has argued for pension funds to work together to encourage companies to improve their disclosure of human capital information.

In an article written for Professional Pensions and available on the trade union Unite’s pensions activist website Soobiah said that the adoption of automatic enrolment in the UK meant the number of workers enrolled in defined contribution (DC) workplace schemes is expected to rise to 17 million by 2030. These workers want to see their money invested in companies that treat their people decently and provide good quality jobs, Soobiah said.

human capital reporting

Pensions provider NEST: workplace issues are important for investors

Soobiah said: “We believe the financial case for taking the workforce into account while investing is strong. A recent Pensions and Lifetime Savings Association (PLSA) study cited ‘human capital’ as the single biggest source of ethical, social and governance risk at the companies in which DC default funds invest. Developing talent is essential to building sustainable and successful businesses. Investing in these types of companies creates opportunities to make better risk-adjusted returns over the long term. On the flipside, there are clear reputational and operational risks if companies do not correctly manage their workforce.”

In recent years she said that Nest had been putting these beliefs into practice by engaging with companies on issues like pay and the living wage and had become a founding signatory to ShareAction’s initiative, which seeks to improve company disclosure about how they manage workers. These engagements, Soobiah suggested had shown that there was still work to do to understand how the companies Nest invest in were managing their workforces.

Soobiah said there were specific factors in human capital reporting that could be used to understand how a company is performing. This included the composition of the workforce which included understanding how workers are paid, what type of contracts they are on and vital issues like diversity. She said these metrics provided context about a company’s employment model and initial indications about how it invests in its workforce.

Other factors to be considered were the stability of the workforce; the company’s training and development of its workforce and how well a company is engaging its workforce. Currently there is a lack of comparable date from companies on these areas but Soobiah suggested there is a strong consensus now that this would change. Investors groups have argued for some time that human capital reporting should improve and the PLSA published a toolkit last year for pension funds wishing to provide better stewardship in this area.

Soobiah said: “This is our chance as institutional investors to collaborate and push the topic into reality for better investment decision-making and stewardship. Our members should be at the front of our minds on this journey. They stand to gain the most if we ensure their savings are invested in companies treating their people decently, but we must be able to measure it.

What do you think?