Liability-Driven Investment

CHAPTER 8ESG, Governance and the Pensions Industry

For pension fund trustees operating today, purely financial decisions and the need to make payments, and meet obligations when they are due, are not 100 per cent of the picture. There has been an increase in the demands on trustees as regulations change to meet the needs of an ageing population. Changes in the standards of pension scheme governance encouraged by an increase in regulation in the sector mean that many other factors are at play.

In the UK more detailed risk reporting has become a requirement as more and more data become available and more risks are identified and understood. From October 2019 all UK pension schemes with more than 100 members have been required to disclose in more detail the nature of their investments, including the risks arising from environmental, social and governance (ESG) concern.

Previously, a statement concerning ESG factors needed to be incorporated into the statement of investment principles. Now for both defined benefit (DB) and defined contribution (DC) schemes it is necessary to have an investment policy taking account of ‘financially material’ considerations, which include ESG factors.

Just like any corporation the governance of a pension scheme can be crucial if it is to meet its goals. It's clear that whilst good governance alone is not enough to guarantee success, that it is good start. As well as possibly a necessary addition to good risk management and financial decision making. ...