Several pension industry officials have been supportive of the UK government’s latest consultation on how social risks affect occupation pensions, however, Lincoln Pensions has issued a stark warning that the impact of social risks on the employer covenant must be taken into consideration.
The Department for Work and Pensions’ (DWP) open consultation – Consideration of social risks and opportunities by occupational pension schemes – which closes today, sought views on the effectiveness of occupational pension scheme trustees’ current policies and practices in relation to social factors.
However, Lincoln has noted that there is no mention of the need for trustees of defined benefit (DB) pension schemes to also understand the potential impact of social risks on the employer covenant provided by the sponsoring company.
Michael Bushnell, managing director of Lincoln Pensions, said: “Given the materiality of DB pension schemes’ continuing reliance on their sponsors, we believe it is essential that trustees act to understand the possible impact of social risks and opportunities on their employer covenant, and to consider how this influences their investment and funding choices.”
He added that understanding the impact on invested assets alone “will ignore a material risk” for DB scheme members.
“We would strongly recommend that an approach to assessing social risks and opportunities facing employer covenant is adopted,” Bushnell said, adding that the assessment of these risks could be undertaken with public information, trustees’ knowledge and management, and professional advice.
A TCFD for social risks
NOW: Pensions, a workplace pension provider, has given its support for regulation on integrating financially-material social risks and opportunities in investment decision-making.
However, it proposes that the DWP introduces similar regulatory structures to those used for climate change, a Task Force on Climate-related Financial Disclosures (TCFD) but for social risks.
NOW: Pensions also welcomed further guidance on the key metrics on social risks and opportunities. Stating that the DWP should clarify governance requirements on social risks and opportunities, including investment policies, trustee skills, integration and disclosure.
Joanne Segars, chair of trustees at NOW: Pensions, said: “Social issues are also core to how we invest our members’ savings. We invest £2.5bn (€2,9bn) of our members’ pension savings. This is a great responsibility. We do so sustainably, thinking about the impact our investments have on both the environment and society.”
Will Martindale, group head of sustainability at NOW: Pensions, said that in recent years regulators and other industry groups have developed practical investment frameworks that help understand the risks associated with climate change.
“However, there has been less regulatory attention to social risks and opportunities. This is, perhaps in part, because social risks and opportunities are more difficult, and in some cases impossible, to quantify. This, however, doesn’t lessen their importance,” he noted.
“We believe the DWP should set out key metrics requirements on social risks and opportunities, with reliable information flows: the TCFD for social risks, if you will.”