venilia amorim

The UK’s Department for Work and Pensions (DWP) recent consultation – Consideration of social risks and opportunities by occupational pension schemes – seeks to assess how trustees understand ‘social’ factors and how they aim to integrate financially material social factors into investment and stewardship activities.

However, the consultation – which closed last month – seems to have sparked concern over the impact of social risks on the employer covenant in particular.

Social risks impact on employer covenant

It addresses issues such as trustees’ legal duties, financial materiality, and how trustees should take social factors into account, but it fails to mention the need for trustees of defined benefit (DB) pension schemes to understand the potential impact of social risks on the employer covenant provided by a sponsoring company.

Industry officials, despite being supportive, believe that given the materiality of DB pension schemes’ reliance on their sponsors, it is essential that trustees act to understand the possible impact of social risks and opportunities on their employer covenant. They should also consider how this influences their investment and funding choices. Lincoln Pensions, NOW: Pensions and Cardano all recommend that an approach to assessing social risks and opportunities facing employer covenant is adopted.

Recently, the DWP, The Pensions Regulator and other industry groups have developed investment frame- works explaining risks associated with climate change – and to invest consistent with the UK’s 2050 commitment to net-zero emissions.

To date, there has been less regulatory attention on social risks and opportunities. It is not common practice for pension schemes to have a standalone policy on social factors, nor for pension schemes to mention social issues – other than within the broad context of ESG factors.

Rather, most schemes have focused their sustainability efforts on climate change. This is, perhaps, because social risks and opportunities are more difficult, and hard to quantify. When it comes to social issues, there is not the political urgency; nor is there consensus on the problems the pensions industry is trying to solve.

Venilia Amorim, editor,