By recognising that, for example, climate change may pose risks to where people can work, the access to resources for that work, eg water, you identify the risks posed to companies and therefore the potential impact of climate change on investment returns.
Indeed, the introduction of climate change reporting for the first time in October 2021 for many pension funds helped to highlight the various investment risks and opportunities that climate change brings.
Understanding these risks and opportunities will help schemes engage with their asset managers to understand how the companies in which they are invested are planning to change and evolve.
With pension schemes managing trillions in assets, it’s a big opportunity to effect change to result in positive investment outcomes long term, by building sustainable companies, holding laggards to account, and consequently improving the impact these organisations have on the world we live in.
FTA: The government wants to accelerate DC scheme consolidation. Do you foresee any risks, particularly when it comes to value for money for members?
RT: The DC own-trust-based marketplace is expected to decline in future years with a move of schemes to master trusts. In future, we see a range of large DC trust-based schemes, group personal pension and master trusts remaining, with most of the smaller trust-based schemes having moved to a master trust.
These larger own-trust-based schemes will generally be schemes with paternalistic employers, with strong in-house teams that favour a best-in-class offering for their members or those with scheme complexities (such as guaranteed minimum pension underpins).
In many cases, these schemes are already larger than many of the master trusts and have implemented sophisticated investment strategies.
There are a number of benefits as well as risks that scheme consolidation brings. Benefits include access to potentially lower cost default options, better technology and greater choice, which all contribute to better value for money for members.
Risks of consolidation include areas such as administration. If admin goes wrong in a master trust with millions of members, not only could this have a significant financial impact on the master trust itself, but it could shake members’ confidence in their pension vehicle.
Clearly, poor administration leads to poorer member experience and arguably poorer value for money.
From a company’s perspective, many have seen the outsourcing of their DC pension arrangements to a master trust or group personal pension arrangement as reducing their governance burden, which is the main driver.
In no other part of their business however, would they invest thousands if not millions of pounds a year into something they don’t interact with regularly on an ongoing basis.
