A new report from Hymans Robertson says that the ESG capabilities of insurers are an increasing priority for DB pension schemes trustees considering buy-ins and buy-outs.
The firm said that trustees needs a ‘critical understanding’ of the role of ESG in order to gain the full benefit. The report, Spotlight: ESG in Risk Transfer Transactions, outlines four key areas of Responsible Investment that Trustees should use to assess a potential insurer with which to partner. These are: culture, integration, stewardship and transparency which, when considered together can help Trustees develop a longer-term view that was not necessarily encouraged by previous guidance.
Paul Hewitson, head of ESG for risk transfer at Hymans Robertson and author of the report, said: “A DB trustee’s key duty is to act in the best interests of its members and, for those pension schemes targeting buy-out, part of that is to partner with insurers they believe can fulfil the responsibility of paying its members’ benefits long into the future. With the introduction of climate regulations, Trustees are now required to consider the risks and opportunities for their scheme that climate change will bring over appropriate short, medium and long-term time periods. Past guidance traditionally led to a focus on material short-term risks, and not necessarily explicit consideration of the longer-term impacts of ESG factors and climate change.”
DB pension plans are schemes in which the benefits of a pension are set out clearly from the beginning, usually calculated along the line as a percentage of final or average earnings across an employee’s career. The benefits of a defined contribution plan, on the other hand, are predicated on the performance of the underlying investments in the pension portfolio. DB schemes are generally considered more financially onerous to employers and, for this reason, have declined in popularity in recent years.
He added: “As it’s likely that emerging risks like climate change could also affect insurers’ future financial strength, Trustees should take the time to understand how an insurer integrates ESG factors and climate-related risks into their standard processes and investment decision making. They can then compare an insurers’ approach with their own scheme’s, which will ultimately help them to feel reassured that any risk transfer transaction will be in the best interest of members in the long-term.”
He concluded: “As insurers continue to focus on Responsible Investment factors and follow the recommended information disclosures, Trustees will have even more information to identify differences and benchmark potential partners. Insurers are making disclosures on things like the way they invest in socially beneficial projects and low carbon initiatives, how they reject investments involved in controversial activities, or how they actively engage with companies they invest in to drive positive changes from an ESG perspective.”
