Social policies in pension schemes

Topic:

Hot topic

Date published:

Thursday, 24 June 2021

Author:

Simon Lewis

As asset owners, pension trustees have clout in helping increase the pace of progress on ESG. Prior to 2020, climate change and related E matters were stealing a march but, mainly through the global covid-19 pandemic and black lives matter protests, societal matters came to the fore during 2020.

Social factors are an integral part of the ESG agenda for pension schemes. It may not be as noisy a topic as climate change but, for many schemes they’re integrated into the sustainable investing agenda which reflects the trustees’ beliefs that E, S and G are all financially material factors and valued equally. It isn’t practical to split out these factors when selecting investments. What is practical is selecting managers with funds that incorporate approaches to voting on management pay, diversity, community engagement and supply chain matters in addition to governance and climate priorities.

What will ESG look like for DC pension schemes?

In the case of defined contribution (DC) master trusts (the logical destination for much of the future growth in UK pension savings), ESG will increasingly become fully integrated into default investment strategies where the bulk of assets lie. For cost and charge cap reasons, these assets will be almost exclusively invested in pooled and passive ESG tilted funds, where social factors are considered alongside E and G factors.

For self-select funds, there’s likely to be further choice for members in various ESG approaches supported by improved communication to allow individuals to align pension saving choices with personal values. The greater take up is for funds minimising risks related to social matters, the greater the emphasis on them by pension trustees will be. That said, it is still likely climate matters will be more popular given the dominance the subject enjoys in the media and from government.

And what about DB schemes?

For defined benefit (DB) schemes, there is more work to do in terms of available funds and consistent reporting to determine which are performing well for ‘S’ purposes, and for pension trustees to benchmark where they are relative to other schemes.

The truth is, for many companies, shortfalls in performance on social factors will have less bearing on long term asset performance than other drivers, so pension trustees must be proportionate in the way they allocate their investment time and resources. Taking a balanced approach to ESG will likely lead to best member outcomes.

It is rare for pension trustees to have good visibility of how companies within pooled funds behave on social issues. In general, they rely on good stories told by asset managers about how they have called out bad behaviour or engaged with management to address failings and promote good behaviour. This doesn’t equip trustees to judge how effective these actions are and portfolio-wide metrics are hard to come with respect to these social factors.

We’re aware of one large consultancy undertaking some benchmark work across several hundred clients. If others can follow and this can be shared into a combined universe, it would benefit all trustees and the industry.

We have been using the growing area of diversity and inclusion in pensions to consider social matters with our co-trustees and advisers whether more could or should be done in the ESG arena more widely – a collective sense of making things better for members, so everyone benefits from targeted investments.

As a large professional trustee, we can use our leverage to ask questions and challenge investment advisers and asset managers. Schemes with smaller sponsors, those under financial duress or pension trustee boards without professional trustees may struggle to have the skills or time available on agendas to consider these issues properly and to effectively challenge their investment and asset managers.

This blog is a summary of PSGS’ response to DWP’s recent call for evidence. You can view our full response here: Consideration of social risks & opportunities call for evidence response.

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