The £2.8bn Reuters Pension Fund is integrating environmental, social and governance factors into its portfolio in order to improve risk-adjusted returns, while achieving a funding level above 100 per cent in 2020.

A newsletter to members revealed that the scheme is trying to better incorporate ESG risk and return factors into its investment strategy.

In order to do this, the £2.8bn scheme appointed Impax Asset Management to handle an active sustainable equity mandate at the end of 2019. The mandate was worth £87.7m as at September 30 2020. 

To fund this mandate, the scheme sold its entire global total return holdings with Invesco, which was worth £97.4m as at the end of 2019.

The scheme has also reduced the carbon intensity of its buy and maintain credit fund with Legal & General Investment Management by 42 per cent, which was achieved by imposing a cap on how much carbon can be produced relative to the revenues of the companies in which the fund invests.

Pension fund secretary Claudia Bunney added that the scheme is considering if there are other opportunities to further reduce the carbon footprint within the investment portfolio.

Elsewhere, the scheme’s allocation to gilts and index-linked gilts increased by 3.8 percentage points to 38.8 per cent over the 10 months to September 30 2020.

Bunney confirmed that this increase was part of the scheme’s derisking strategy.

The scheme has also extended its annuity policy with Canada Life to cover a small amount of additional payments. In August 2019, a further £16.6m buy-in was transacted, which was funded from excess cash in the liability-driven investment portfolio.

Schemes pressured to deliver on ESG

Trustees in the UK have been asked to improve their ESG investment strategies, with a series of new rules being proposed by the government and regulators.

Trustees must currently produce a statement of investment principles, to be published online, setting out their policies on financially material ESG considerations, including climate change.

For pension funds that have published their annual reports since October 2020, an implementation statement describing whether certain policies in the scheme’s SIP have been followed and trustees’ voting behaviour also needs to be published.

Adding to this, the Department for Work and Pensions launched in January a consultation on new rules for taking action in this area, proposing that schemes with assets of £5bn or more will have to meet new governance requirements from October 2021, and their trustees must publish a Task Force on Climate-related Financial Disclosures report within seven months of the end of the scheme year.

Earlier in April, the Pensions Regulator published its new climate change strategy in which it was announced that trustees will be required to add more climate change information to their scheme returns, and has promised enforcement action where pension funds do not comply with basic requirements.

Scheme achieves funding surplus

According to the newsletter, the 2019 actuarial valuation of the Reuters Pension Fund showed a surplus of £32m, which at the end of October 2020 stood at £13m.

This improvement, which compares with an £87m deficit in the previous valuation in 2016, was partly due to the deficit reduction contributions paid by the sponsor, the scheme stated.

The investment returns on the scheme’s assets have also improved the funding position over the period, now at 101 per cent, although fluctuations in investment markets meant assets delivered below the trustees’ assumptions in 2018.

Considering that the scheme is now at a surplus, the trustees and the company agreed that no further deficit reduction contributions were needed.

The trustees and company agreed contributions to meet the cost of benefits building up and ongoing expenses, with the next review scheduled for the December 2022 actuarial valuation.

The scheme’s statement of investment principles reveals that it has the investment objective of reaching 105 per cent full funding by December 2030 on a gilts basis.

This article originally appeared on Mandatewire.com

Additional reporting by Maria Espadinha

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