Climate change, sponsoring employers’ responsibilities and the lack of development of a deferred annuities market are keeping executives at some of the U.K.’s biggest pension funds awake at night.
Speaking during a panel discussion at the Pensions and Lifetime Savings Association’s investment conference Thursday in Edinburgh, Robert Waugh, chief investment officer of the £33 billion ($47 billion) Royal Bank of Scotland Group Pension Fund, Edinburgh, said: “Divestment, I think, is a complete waste of time,” since it simply moves capital around. Mr. Waugh said the best way of dealing with climate change risk is to engage, and encouraged wider participation in “Aiming for A,” a pension fund-led initiative to engage with companies on these issues.
Mr. Waugh added that, as an asset owner, the pension fund has a responsibility “to provide capital to areas that are helping” to alleviate climate change risk, such as renewable energy. He highlighted wind farms as a “great investment for pension funds” due to returns, diversification and inflation-hedging potential; and said RBS executives are also looking at solar and waste energy.
Faith Ward, chief risk officer at the £2.7 billion Environment Agency Pension Fund, Bristol, England, said the pension fund takes a more “nuanced” approach to climate change than pure divestment, using a combination of decarbonization and engagement.
Mr. Waugh also highlighted the issue of sponsoring employer covenants, or the employer’s obligation and ability to support its pension fund. “I think the next crisis is different from the last crisis. I think when we do covenant analysis we now need to look beyond (the employer’s) balance sheet and the profit and loss of the companies that are our sponsors.” For the RBS fund, that means considering financial technology, and running scenarios of what the future shape of banking looks like, and what that means for the sponsor. Investment and funding strategies need to be worked out against those different scenario outcomes, he said. “What are the triggers you will put in place that will change your flight path (as you) move from one scenario to another,” Mr. Waugh added.
The panel also discussed the defined contribution market. Mark Fawcett, chief investment officer of the £772 million National Employment Savings Trust, London, referred to the need for a deferred annuity market. “It is getting the longevity insurance (that keeps me awake at night). We have had conversations with insurance companies, and there is very little appetite, if any, to write deferred annuities. We are thinking of other ways to deliver that later life protected income. Having that longevity insurance is really important,” Mr. Fawcett said, particularly given increased life expectancy and the removal last year of a requirement to purchase an annuity at 65. “I’m really hopeful that market will develop,” he added.