Responsible investing, good governance take focus at PLSA conference

Retirement plans of the future will focus on responsible investment, good governance and strong culture, speakers said at the Pensions and Lifetime Savings Association annual investment conference.

Retirement plan executives will also face pressure from the business models of their sponsoring employers over the next decade as well as figuring out how to unearth returns, said panelists at the conference, which took place March 11-13 in Edinburgh.

Noting that plans need to join together to ensure their governance processes are robust, Denise Le Gal, chairwoman of Brunel Pension Partnership, Bristol, England, a £30 billion ($39.1 billion) pool of U.K. local authority pension funds, said on a panel that current fund structures are not sustainable if executives are serious about improving governance.

"A further consolidation is probable in the local authority pools and the private sector," she said.

Ms. Le Gal added that centering retirement plans' work around responsible investment, good governance and culture will help alleviate the pressure from traditional challenges such as funding gaps.

"If you (get) those right, then you are in (a) position to invest in good sustainable companies and not to invest in companies that may not be around in 10 years," Ms. Le Gal said.

"We have a huge role to play in influencing that the world grows in a sustainable manner," she added.

Exposure to climate-related risks will be the biggest theme for retirement plans by 2030, retirement plan executives said.

"We need to understand it to protect (returns) from those risks," said Nico Aspinall, CIO of the People's Pension, a £9.7 billion defined contribution multiemployer plan in West Sussex, England, sponsored by B&CE in the same panel discussion as Ms. Le Gal.

"We — as a plan that will have between £50 (billion) and £60 billion in assets in a decade — need to encourage the private sector to get to zero net emissions by 2050," he said.

Avoiding brown assets, for example stocks of coal producers, is not the same as divesting, Mr. Aspinall said. "We need to use contributions to build (a) green economy," he said. But he added that it is as important for retirement plans to engage with the "brown economy" oppose to straight divestments.

The conference attendees also heard that portfolios will not be immune to stock market impact as plan executives nail down sustainable investing strategies.

Noting that the coronavirus outbreak's impact on the global economy could be lasting, Gerard Lyons, international economist and chief economic strategist at wealth management firm Netwealth Investments Ltd., said during a separate presentation that the global economy will require an unorthodox policy response.

The global economic slowdown will extend into the second and third quarter of 2020, as China will experience a slowdown and Europe and the U.S. will be at a standstill, Mr. Lyons said. "During the (global financial crisis), the policy (response) did work, but we still had a recession," Mr. Lyons added, warning that the virus could take the global economy into a recession in the way that the global financial crisis did.

But local authority pension funds are less concerned with the impact of the outbreak of COVID-19 and its impact on financial markets, said Chris Hitchen, chairman of the £45 billion pension pool Border to Coast Pensions Partnership, Leeds, England, during a separate panel discussion.

"There is not as much panic about what's happening in the markets. For many schemes, market reductions are a good thing," he added. "Particularly for NEST, there is more value in the future contributions when you can buy assets at a reasonable price," he added. NEST, or the National Employment Savings Trust, London, is a multiemployer master trust with £10 billion in assets.

Mr. Hitchen also welcomed a £640 billion package that included infrastructure and housing measures, which formed part of the U.K. budget announced by Chancellor of the Exchequer Rishi Sunak on March 11. "Local authorities are more concerned with (the) real world rather than markets," Mr. Hitchen said.

However, speaking on the subject of the budget during a separate panel, Mr. Aspinall was more skeptical about the government's role in generating future returns than Mr. Hitchen. He said the government is not directing investments into any specific strategies.

For Mr. Aspinall, investing in smaller companies with the use of technology will be an important investment theme in the future. "Blockchain enables micro-access to firms which previously were not (invested in) by institutional investors."

"The economy has become more concentrated toward larger economies but there are millions of small companies out there," he said. "The institutional investor of the future will be able to access smaller companies more locally."

Establishing a sustainable culture internally is as important as investing in sustainable companies, Brunel's Ms. Le Gal said.

"Collaboration and cooperation (are needed) to achieve better governance overall," she said.

And as retirement plans' boards continue to struggle with diversity of their members, trustees should challenge their plan sponsors to ensure the corporation's board is a diverse group, said Sarah Smart, an independent investment committee member at the £9.8 billion Unilever U.K. Pension Scheme, Darlington, England.

Trustees can also demand evidence of greater diversity across the investment value chain, said Gavin Lewis, head of U.K. local government pension funds at BlackRock Inc., speaking on the same panel as Ms. Smart. "If you demand it, people will respond," he said.

Mr. Lewis warned that prejudice in the industry has evolved and is now less easy to detect.

"We want to challenge the sophisticated prejudice" through engaging with people, added Sayeeda Warsi, lawyer and former U.K. cabinet minister.