Seeking members' ethical views could muddy DB waters, experts say

In its Greening Finance report published on Monday, the EAC also called on the government to make it mandatory by 2022 for large companies and asset owners, such as pension funds, to report their exposure to climate change risks and opportunities.

In March 2018, the EAC wrote to the UK’s largest 25 pension schemes to ask how they manage the risks climate change poses to retirement savings.

While the majority responded by saying they were taking steps to manage climate risk, committee chair Mary Creagh noted that a small number of funds appeared “worryingly complacent”.

Actively seeking member views

While significant progress is being made by some pension funds, including commitments to reporting in line with guidelines set by the Task Force on Climate-related Financial Disclosures, “a minority of the top pension funds do not appear to have given climate change much strategic thought”, according to Monday's report.

It noted that this creates risks for beneficiaries, stressing the need for TCFD reporting to become a mandatory requirement for all large asset owners by 2022.

The EAC urged the Department for Work and Pensions’ forthcoming consultation to propose “a change in the law to require pension fund fiduciaries to actively seek the views of their beneficiaries when producing their statement of investment principles or investment strategy statements”.

The report added that the DWP must set out guidance on how to ensure evidence of members’ views is gathered robustly.

A DWP spokesperson said: “Pension schemes must take account of all financial opportunities and risks when they set their investment strategy – and as sustainability will often have financial implications, trustees should be considering this too.”

Last year, the government said it was “minded” to make the proposed changes set out in the UK Law Commission’s June 2017 report on ‘Pension Funds and Social Investment’, and said it would consult on changes to policy and regulations during 2018.

The spokesperson said: “This month the government will publish a final response to the Law Commission report on social investment and consult on measures in this area.”

Only relevant in a DC world

Experts expressed concern over the lack of differentiation between DB and defined contribution schemes in the EAC report.

“Within DB the job of the trustee is to make sure that the member gets their promised level of pension,” noted Stuart O'Brien, a partner at pensions law firm Sackers. He stressed that trustees should be taking climate change into account, but “they should do it because that’s the right thing to do financially”.

While actively seeking members’ views may work in a DC context, “it muddies the waters for DB, because you’ll end up with trustees further conflating members’ ethical views with the trustee job of taking account of financially relevant factors”, O’Brien said.

Richard Butcher, managing director at professional trustee company PTL, said he could see the relevance of the EAC’s recommendation in a DC world.

“The member has a pot of money, there is a default investment strategy, the members can choose to invest in another way – but they take the investment risk,” he said. “If you consult with the members, they bear the consequences of the outcome of the consultation,” Butcher added.

In a DB world, with a majority of DB schemes closed to future accrual, “it’s not really the members’ money," said Butcher. "The members have got an entitlement to a benefit – a final salary benefit, or a defined benefit – they don’t have an entitlement to a sum of money, unless they choose to transfer out, and of course it’s not them that’s underwriting the cost of the benefits – it’s the sponsor”.

If the members were to object to a certain investment strategy, but the employer wanted to continue with that strategy, “the trustees are left between those two places – what do they actually do?” Butcher said.

Tim Middleton, technical consultant for the Pensions Management Institute, agreed that the report “doesn’t appear to draw a proper distinction between DB schemes and DC schemes”. He also highlighted the practical difficulties of consulting with members on these issues.

Honor Fell, associate manager research at consultancy Redington, said: "While tools are available for climate reporting, comprehensive reporting on pension fund assets is currently challenging.”

Tools tend to be complex, often do not cover all of the asset classes that schemes invest in, and require a technical understanding, she said.

“This can change, but it requires commitment and investment from multiple stakeholders,” Fell added.