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Survey Report

Spotlight on bulk annuity insurers and ESG

Chapter seven of the 2021 de-risking report

Pensions Corporate Consulting|Pensions Risk Solutions|Pension Board and Trustee Consulting|Pensions Technology

By Hazel Kendrick | January 19, 2021

We know with certainty that society is facing big changes in the future, and one of these is climate change. Whilst Environmental, Social and Governance (ESG) is much broader than climate change, over 2020 barely a day went by when climate change wasn’t in the news, and actions being taken by bulk annuity providers are dominated by an environmental focus. Hazel Kendrick considers what changes we are seeing in the pensions industry and in particular shares the results of our latest ESG survey of UK bulk annuity providers carried out in Autumn 2020.

The UK government’s commitment to net zero emissions to reduce the threat of climate change by transitioning to a lower carbon economy continues to make the headlines. In the US, the incoming Democratic party has made commitments to making America a clean energy superpower. In the autumn of 2020, China announced to the UN General Assembly in New York that it will target carbon neutrality by 2060, which, given China’s global emissions count for nearly a third of the world’s carbon dioxide emissions, is a significant step forward.

Focus from politicians, actions by regulators, and the demand from investors could be the thing we have been waiting for since the first climate change public reviews and policies announced in the early 1990s. Since then, as shown in Figure 6, we’ve had the Paris Agreement in 2015 - and what a long road it has been before we are finally, I hope, seeing real change!

The pensions industry

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Pension scheme reaction

Large pension funds are recognising the impact of climate change threats to meeting long-term commitments, for example, the BT Pension Scheme announced in autumn 2020 that it aims for its entire £55bn portfolio to be net zero over the next 15 years, by 2035.
The government’s National Employment Savings Trust (NEST) announced in 2020 a forward-looking statement of actions it is taking to align its investment portfolios to halve carbon emissions by 2030.

For us in the pensions industry, for some time, there have been headlines about trustees’ fiduciary duties to actively address environmental risk in asset portfolios and more recently, we are being implored to assess the impact on pension fund liabilities and covenant. In 2019, the Pensions Climate Risk Industry Group was set up and, in 2020, the Department for Work and Pensions published a consultation on occupational schemes taking action on climate risk. Whilst the outcome of this is awaited, a number of large schemes are proactively tackling the climate change threat, and making public statements about doing so.

It is impossible to think that as/when these schemes progress on their de-risking journeys that they will not expect insurer and reinsurer attitudes and actions to reduce climate threat to align with best practice.

Bulk annuity providers

The Willis Towers Watson transactions team are taking the lead on engaging with bulk annuity insurers on their ESG strategies. The insurers know that we expect material progress on embedding and living by ESG policies to be made, and that our clients will demand it as an important aspect of their preferred provider selection process.

As part of the role Willis Towers Watson has to help, influence and shape progress across the industry and as signatories of the Principles for Responsible Investment (PRI), we are actively engaging with and encouraging insurers to develop and implement good sustainable investment practices, including becoming PRI signatories themselves. Alongside this, we are carrying out an assessment of insurer’s policies and their progress.

It is very encouraging that ESG has c-suite leadership commitments behind it, with ESG being a formal part of the CEO/CIO’s role for 80% of our responders.”

Hazel Kendrick | Senior Director, Transactions

As part of our latest survey of UK bulk annuity providers carried out in Autumn 2020, the majority are signatories to the PRI, and where they are not yet signatories, they have told us that they will be imminently. Those providers cover around £225bn of annuities. All responders have at least one individual dedicated to ESG analysis, but the resources employed by our responders varies hugely – from one person to a team of over 20.

Consideration of ESG risks for investments are embedded within the investment process for all our responders. 80% are either already disclosing in line with the Task Force on Climate-related Financial Disclosures (TCFD) framework or will start doing so in 2021, which represents a remarkable step up by insurers on environmental issues! TCFD has now become increasingly recognised as a board room agenda item and governments around the globe are helping push its adoption.

COVID-19 has demonstrated the art of the possible

A further area that insurers are giving attention to is their limits on environmental exposures. Not only are insurers thinking about this and integrating coherent policies into practice, 2020 has given a very helpful platform for TCFD on Scope 3 greenhouse gas emissions by their businesses. Emissions from buildings, use of electricity, business travel, waste disposal etc have materially declined in the advent of so many staff working from home, giving a lens through which to look at what businesses can achieve. This opportunity is certainly making insurers think, and instead of just working on transitioning to decarbonised investment portfolios, some are looking at how they can stop their Scope 3 emissions rating shooting up to pre-COVID levels.

Progress to a cleaner future…

2020 has seen an astonishing trend for insurers making commitments for net-zero targets, and 60% of respondents report publicly on both the positive and negative impacts of their investments on society and the environment, either directly or via their asset managers. One large insurer is leading the way with a public decarbonisation plan that aligns with the Paris Agreement. The next steps include driving up the effectiveness of the various policies relating to screening/exclusion of investments in particular businesses, and in policies regarding stewardship expectations for issuers.

Whilst there remains much to do, the steps that the bulk annuity insurers are taking are very positive – the significant focus of insurers on climate and their keenness to demonstrate this in their strategies is certainly pointing in the right direction.

Bulk annuity providers should continue to be encouraged by trustees and other pensions leaders to carry on driving forward. We need to ensure that ESG credentials are embedded into bulk annuity provider and reinsurer selection processes.

Trustees often value insurer brand. Going forward, trustees and other pensions leaders are likely to start linking an insurer’s ESG behaviours to the view of the strength of the insurer’s brand – so an insurer with top tier ESG credentials could enhance their brand image.

What next?

Our latest survey of UK bulk annuity providers took place in the year that the Black Lives Matter social movement opened our eyes to many social issues that need to be addressed – and the strong focus on environmental sustainability is the tip of the ESG iceberg. As insurers, industry, investors and the world continue progress on E, whilst maintaining the focus already on G, I hope that they also pay greater attention to the final piece of the jigsaw, Social policies, in 2021 and beyond.

Next chapter - New kids on the block – a look at Third Party Capital Solutions


Senior Director, Transactions

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