Sustainability Principles Charter Connects Insurers, Pensions
The coalition has agreed on four sustainability principles to inform the bulk annuity process.
A new charter is attempting to promote alignment on sustainability-focused priorities between UK insurers and pension schemes.
In January, the Church of England Pensions Board (COEPB), Accounting for Sustainability and Railpen led a coalition of pension funds, insurers, and pension advisers to produce the Sustainability Principles Charter for the bulk annuity process.
The bulk annuity process refers to the practice whereby pension funds transfer responsibility for the oversight of capital involved in a transaction to a select insurer. A key concern, however, is that where a sustainability-focused pension fund has a clear set of sustainability targets for its investments, it may see a reversal or lack of continuation of these efforts once the insurer has taken control.
Michael Bushnell, Head of Sustainability Advisory at pensions risk and investment management provider Cardano, noted that this had been flagged by the COEPB during a partial buying process. Cardano provides covenant advice to the pensions board.
“It became very clear that one of the defining features in the COEPB’s choice of an insurance counterparty [for the bulk annuity] was the sustainability approach and risk profile of the insurer,” said Bushnell. “But there is very little public disclosure from these firms on sustainability themes.”
The development of the charter has offered an opportunity to work with insurers to make previously private sustainability-related information more public through a framework that is consistent and comparable. Bushnell suggested this would help pension trustees make more informed decisions when choosing an insurer that is best aligned with their sustainability requirements.
“We don’t have full [sustainability-focused] disclosure from anybody across the whole financial ecosystem at the moment,” he acknowledged. “At the same time, it’s clear that sustainability themes pose real risks to insurers and pension schemes, and to members who are transferring liabilities across to them.”
Clearer perspective
Against this backdrop, the charter aims to provide a wider value chain view, based on four key principles: transparency, decision-making, reporting and engagement, and collaboration.
It calls for insurer signatories to provide transparency on their sustainability-linked values and investment beliefs, as well ongoing related commitments. Clear evidence of how those considerations are incorporated into investment analysis and decision-making processes, as well as into stewardship activities, is also imperative. The charter further notes that ongoing reporting and engagement on sustainability beyond the point of transaction is necessary.
“Getting insurers in the same room as pension trustees to discuss sustainability was a great start, as it became clear that they were both talking about the same things and looking at the same problems,” said Bushnell. “Insurers have an interest in making their position clearer for potential customers.”
Insurer signatories – which include Aviva, Legal & General, and Standard Life – are expected to implement the charter’s principles as soon as possible.
Karen Shackleton, Chair and Founder of Pensions for Purpose – a consultancy dedicated to supporting the acceleration of capital flow towards impact investment – noted that the establishment of the charter was a welcome step towards corporate defined benefit (DB) pension funds taking a long-term perspective on ESG.
“In many of our conversations with corporate DB pension funds, we have encountered resistance to introducing sustainable and impact strategies because their focus is on buy-in or buy-out within a short timeframe,” said Shackleton.
She recalled how a pension fund had once admitted it was only interested in what insurers expected its assets to look like, so that the bulk annuity process would be as easy as possible.
“If the insurers communicate the need for assets to be aligned on climate, nature and other sustainability criteria, we should begin to see a shift towards investments aligned with those beliefs,” she added.
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