Sustainable investing in pensions: Top tips for sponsors of pension schemes
This report provides insight into embedding social and environmental risk into pension schemes to meet the growing economical demand. This guidance provides actionable top-tips for any sponsor to take the necessary steps to align their organisation’s values with their pension scheme.
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OVERVIEW
The pension landscape
The report explains that sponsors of Defined Benefit (DB) and/or Defined Contribution (DC) pension schemes can no longer afford to ignore the argument for sustainable investing. ESG considerations should be aligned with values and the sustainable business objectives of the sponsor to ensure that they are meeting their fiduciary duty towards the beneficiaries. This will enable beneficiaries to make clear decisions on investment, align their values with that of the sponsor and improve employee retention rates. The report also highlights that ESG considerations can also broker a two-way relationship between employees and their trustees, providing insight into their priorities and further deepening engagement.
The UK regulatory landscape and fiduciary duty
The report highlights changes made by the Department for Work and Pensions (DWP) to the Occupational Pension Schemes (Investment) Regulations 2005. This requires trustees to disclose how they have considered ESG, stewardship, and engagement, in their investment approaches. The Pensions Regulator (TPR) has also published guidance since October 2019 that mandates pension trustees to document their approaches to ESG. As an increasingly urgent regulatory concern and financial risk, ESG affects the ability of investors to provide loyalty or prudence. In order to fulfil fiduciary duty, trustees should also consider the financial implications of ESG risks and determine the extent to which they are financially material.
ESG as a mutual interest
The report describes that ESG can bring Pension trustees and sponsors together and foster a collaborative relationship between the scheme and its sponsor. Sustainable investing can help to enhance investment performance, reduce volatility, increase risk-adjusted returns, and enhance opportunities for asset diversification. Evidence suggests that the investment in firms promoting social issues pays off. The report suggests the development of a ‘mutual interest’ in ESG through a two-way engagement with members.
Top tips for sponsors
The report concludes with practical steps for engagement and top-tips that sponsors should follow for pension trustees, including the following:
Understand the evidence base and invest in training
Given the variance of nuances of engagement between sponsors and their pensions, conversations on long-term horizons and sustainability can be effective if the method of engagement is tailored. Sponsors should work together with their trustees and scheme’s Chief Investment Officer to set up knowledge-sharing platforms for engagement. They should also encourage the appointment of investment managers who are responsible investors, which can subsequently clarify the agreed approaches to ESG topics.
Understand what is important to pension members
Implement online surveys for member engagement to encourage information sharing and feedback. Breakdown ESG topics into relevant issues your members are reading and talking about. Moreover, use relevant language designed specifically for member understanding, and provide case studies to show what types of impact pensions have for members.
Support pension trustees through the investment process and decision-making
Encourage the appointment of investment managers who are responsible investors and consider how they engage with boards of investee companies on ESG. Additionally, consider investment strategies that allow engagement on ESG issues, including the possibility of collaboration with other investors to influence change.
Align and streamline processes with pension trustees
Share your experience around established processes with your pension scheme to enhance their alignment. Reduce the complexity of information communicated and ensure transparency across the variety of priorities of large memberships.
Overall, this report provides sensible and practical guidance for sponsors looking to successfully integrate ESG considerations into their pensions, aligning company values with pension schemes and meeting the growing demand for greater ESG transparency amongst beneficiaries.