LGPS Russian exodus under way as TPR tells trustees to ‘be vigilant’

Some of the UK’s most prominent pension schemes, including Nest, the Church of England Pension Fund and the Universities Superannuation Scheme, have been freezing or seeking to cut their investments in Russia since troops set foot in Ukraine in February.

Western powers have been ratcheting up sanctions on Russia, with major companies and investors cutting ties with partners in the nation. 

The Moscow Stock Exchange closed on February 28. An apparent ban on western companies from selling Russian investments imposed by prime minister Mikhail Mishustin has compounded investors’ liquidity problems, with markets for Russian stocks and government bonds drying up.

We believe that this position firmly sits within our fiduciary duty and has been reached based on responsible and investment considerations

Councillor Jayne Kirkham, Cornwall Council

These hurdles have not deterred LGPS funds from trying to get out of Russia. 

In new guidance issued on March 4, TPR said that it expects schemes and their trustees to “be vigilant” and discuss the Russia conflict with their advisers.

Investments must not undermine sanctions on Russia

Pension trustees are expected to uphold their fiduciary duties to members, prioritising scheme returns and the proper payment of pensions.

They are allowed to consider ethical factors concerning investments, and can divest from problematic assets provided that this does not prove materially detrimental to the scheme. 

The watchdog has asked schemes to ensure that their investments are aligned with the UK government’s sanctions on Russia. 

It reminded trustees, however, of the long-term nature of pension investments. “This means not making hasty, uninformed decisions about your overall portfolio,” the regulator said.

Areas for consideration also include the war’s impact on defined benefit schemes’ liquidity needs, along with the health of the sponsoring employer and any subsequent impact on covenant.

The conflict with Russia has also increased the potential for cyber attacks, along with arise in scam activity as member enquiries increase, TPR noted.

Brunel Pension Partnership stops new Russian investments

The Brunel Pension Partnership, which manages more than £35bn of assets linked to 10 LGPS funds, has stopped new investments in Russian assets.

It also intends to divest from all of its Russian assets and engage with non-Russian assets that generate material levels of revenue or profits from the country.

The Dorset County Pension Fund has indirect exposure to Russia. Its assets are managed as part of the BPP.

“First and foremost, we are deeply saddened by the recent tragic events in Ukraine,” a Dorset spokesperson said.

Its holdings are conducted through the fund’s investments in an emerging markets equity fund managed by the BPP. 

The value of this exposure is around £5mn, or 0.13 per cent of the fund’s total assets of £3.8bn. The pension fund committee will discuss this exposure at a meeting on March 10.

The £2.3bn Cornwall County Council Pension Fund, which is also part of the BPP, has direct holdings in Russia as part of its global investment portfolio, which amounts to less than 0.3 per cent of its assets.

Councillor Jayne Kirkham, chair of Cornwall Council’s pension fund committee, said: “I am pleased we have been able to act so quickly to ensure that our money is not invested anywhere that may benefit the Russian regime.

"We believe that this position firmly sits within our fiduciary duty and has been reached based on responsible and investment considerations.”

More inflation beckons

The Wales Pension Partnership is taking similar action, opting to divest from its Russian holdings as soon as possible. These make up less than 1 per cent of its assets.

“Given the circumstances we do not believe that engagement with these companies presents a viable option,” said councillor Clive Lloyd, on behalf of the Wales Pension Partnership and the LGPS in Wales.

It has so far been straightforward for institutional investors to reach a moral consensus over divesting from Russia. 

From a financial perspective, investors and campaigners appear to agree that any holdings in the region are highly vulnerable to losses, although exposures as a proportion of total managed assets appear low.

“Our pensions are invested in Russian companies and Russian government debt. We believe this is morally wrong and financially unsustainable in the current climate,” said Tony Burdon, chief executive of Make My Money Matter.

“The British public agrees, with 86 per cent saying they don’t believe UK pensions should be invested in Russia,” he added.

The conflict shows little sign of abating, threatening to hamper Europe’s economic progress as the continent emerges from the coronavirus pandemic.

DB pension schemes have spent years diversifying their portfolios, increasing their hedging levels in anticipation of an eventual inflationary rebound. 

Commodity price surges will fuel further inflationary pressures on schemes. Russia and Belarus provide roughly 14 per cent of the world’s wheat supply and a quarter of global wheat exports, according to Moody’s.

“Escalation of the military conflict would put Europe’s economic recovery at risk,” said Kelvin Dalrymple, vice-president senior credit officer at Moody’s. 

“The rest of the world will be affected by commodity price shocks at a time when inflation is already high, and by financial repercussions from the sanctions against Russia and from financial market volatility.”