The Pensions and Lifetime Savings Association has made a string of recommendations to the government on environmental, social and governance investment issues, alongside a call to point retiring defined contribution members towards “preferred” products.
On Wednesday the influential lobbying organisation backed seven new policies to overcome what it sees as “immature infrastructure” around investing in a way that deals with the risk of climate change. The industry group also criticised the inconsistent terminology, poor analytics available to fiduciaries, and limited range of products that plague green investment.
The call, which includes an appeal for the issuance of green gilts, is likely to reinforce the stance of a government that has put increasing pressure on trustees to take account of sustainability risks, and would like to see pensions fund renewable domestic projects.
Climate change is a massive issue and the pensions industry has the opportunity to help mitigate its impact by investing in a climate-aware way
Richard Butcher, PLSA
“If we can unleash the productive power of our pension funds, they can be at the forefront of seizing sustainable opportunities by financing the green-tech and green energy revolution we need,” pensions and financial inclusion minister Guy Opperman wrote in an essay for the Social Market Foundation and the Chartered Banker Institute on October 6.
Trustees of many pension schemes are now required by law to publish statements of investment principles, including policies on material risks such as climate change, and from this month will have to produce implementation statements alongside their annual reports. Further measures on reporting in line with the Task Force on Climate-related Financial Disclosures are contained within the pension schemes bill.
Conflicting scores undermine climate struggle
In its call to action, the PLSA argued that there are still key structural weaknesses in the climate-aware investment landscape.
It recommended a review, jointly led by industry and the government, to tackle the confusing array of standards and definitions in the market place, working towards “a common language and taxonomy ahead of COP26”.
It also recommended that TCFD adoption be enforced more widely, with similar requirements placed on others in the investment chain, and called for green gilts to improve the ease with which pension funds can access sustainable investment products.
The industry group committed itself to delivering better training and education, working with the International Corporate Governance Network, and developing guidance on what good climate stewardship looks like.
Richard Butcher, PLSA chair, said in a statement:“Climate change is a massive issue and the pensions industry has the opportunity to help mitigate its impact by investing in a climate-aware way. This report highlights some of the barriers to climate aware investing — none of which are insurmountable — and proposes some actions to overcome them.
“We’ve spent a great deal of time talking to all parts of the pension investment chain about these barriers and, while some pension schemes are already taking a proactive and leading position on the subject, there is a genuine appetite throughout to address them and do more.
DC savers need more retirement help
Meanwhile, on Tuesday the PLSA called for the creation of a new regulatory framework to support DC savers in retirement.
The framework would involve a statutory duty for schemes and providers to support members in their decisions about how to access their pot.
In practice, this duty would be fulfilled by member communication and education, offering or signposting to a “preferred” decumulation product, offering a default investment strategy for those who do not opt in to the preferred solution, and having adequate governance to support this across the DC market.
Emma Douglas, chair of the PLSA policy board, said: “The pension freedoms radically revised the journey for savers when they reached retirement, bringing new opportunities, challenges and risks to savers and pension schemes.
“The decumulation framework we are recommending today responds to the evolution of the pensions system. It will provide vital support to savers and help bridge the gap between the inertia that makes automatic enrolment such a success, and the range of choices (which can be confusing) savers face when electing how to draw their pension at retirement.”
DC contributions too small to allow for sustainable retirements
Stagnant incomes, rising wealth inherited later in life, and the relative poverty of defined contribution schemes compared with older defined benefit schemes are all factors that threaten the sustainability of retirement income, according to speakers at the Pensions and Lifetime Savings Association’s annual conference.
The report was warmly welcomed by Hymans Robertson head of DC Mark Jaffray, but he cautioned on the importance of using the right longevity assumptions to underpin any nudges towards retirement products.
“As part of the guidance it is also vitally important that advisers, trustees and members ensure they have a deeper understanding of pensioner longevity and avoid the ‘flaw of averages’,” he said.
“Analysis from longevity analytics provider Club Vita shows us that there is significant variation in life expectancy across geography and socio-economic groups — a 10-year gap between the longest and shortest-lived individuals based on current data for males aged 65.
“The gap may widen further in the wake of Covid-19. The financial consequences of mis-estimating life expectancy (either due to anchoring expectations to a past generation or to the average) is material.”
The PLSA has also called for the government to put an end to the net-pay anomaly — a tax quirk meaning an arbitrary portion of savers earning less than the income tax threshold lose the tax relief to which they are entitled.
Nigel Peaple, director of policy and research, said: “An ongoing tax administration issue, the net pay/[relief at source] anomaly, has meant approximately 1.5m lower earners in net pay schemes are missing out on pensions tax relief.
“The PLSA has consistently called for a central fix to HM Revenue & Customs’ processes (known as the P800 solution), which would ensure that every saver receives a government contribution to their pension savings. The inequity of the existing system, which disproportionately impacts low earners and women, has gone on for too long and must be fixed if all savers are to get the most out of their retirement savings.”
