A 2022 guide to DC pensions
Focus is a publication that aims to bring you face-to-face with a selection of key investment managers, advisers, and providers from across the institutional pensions market.
© 2021 Incisive Business Media (IP) Limited
In the wake of the Covid-19 pandemic, pension funds in the UK face a list of challenges that are forcing them to look for more sophisticated investment solutions. With traditional investment strategies no longer offering the necessary returns to guarantee a comfortable retirement - and an unfavourable economic backdrop - pension investors need more support now than at any point in the last two decades to meet their goals.
IN THIS EDITION
This is a financial promotion and is not investment advice. The views expressed are those of the authors at the date of publication unless otherwise indicated, which are subject to change, and are not investment advice. The Funds are sub-funds of Royal London Multi Asset Funds ICVC, an open-ended investment company with variable capital with segregated liability between sub-funds, incorporated in England and Wales under registered number IC001058. The Company is a non-UCITS retail scheme. The Authorised Corporate Director (ACD) is Royal London Unit Trust Managers Limited, authorised and regulated by the Financial Conduct Authority, with firm reference number 144037. For more information on the fund or the risks of investing, please refer to the Prospectus or Non-UCITS retail scheme Key Investor Information Document (NURS KII Document), available via the relevant Fund Information page on www.rlam.co.uk. Issued in November 2021 by Royal London Asset Management Limited, 55 Gracechurch Street, London, EC3V 0RL. Authorised and regulated by the Financial Conduct Authority, firm reference number 141665. A subsidiary of The Royal London Mutual Insurance Society Limited.
For Professional Clients only, not suitable for Retail Clients
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In this Focus, Royal London Asset Management’s team of experts discuss these challenges and how pension schemes can tackle them head on. Head of Equities Peter Rutter explains how the firm’s equity mandates combine an active, responsible investment approach with low costs to meet pension funds’ needs. Meanwhile, Head of Multi-Asset Trevor Greetham talks us through the four retirement investment pathways and the solutions RLAM offers in order to meet the need for varied pensions solutions.
For Professional Clients only
© 2019 Incisive Business Media (IP) Limited
Campe Goodman on how impact bond investors can shift the world into a better trajectory
Focus is a publication that brings you face to face with a selection of the most in-demand asset managers in the UK and across the globe.
Sustainable investing is growing fast and one of its newest tools – impact bonds – further increases the opportunities available to investors. By using impact bonds, debt investors can pursue returns while putting their money to work on solving the world’s biggest social and environmental challenges.
In this Focus, Campe Goodman, portfolio manager at Wellington Management, discusses the key issues surrounding impact bonds including how capital can be steered towards the most beneficial projects. He also introduces the Wellington Global Impact Bond Fund, which has the goal of addressing some of the world’s most pressing challenges while seeking to provide strong financial returns.
And not forgetting the growing focus on ESG...
As pension funds’ ESG reporting commitments increase, RLAM’s Head of Engagement Carlota Garcia-Manas tells us how the firm is helping its clients meet these obligations, the importance of engagement, and her hopes for a decarbonised future as commitment to fighting climate change intensifies globally.
Past performance is not a guide to future performance. The value of investments and the income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Counterparty risk: The insolvency of any institutions providing services such as safekeeping of assets or acting as counterparty to derivatives or other instruments, may expose the fund to financial loss. Credit risk: Should the issuer of a fixed income security become unable to make income or capital payments, or their rating is downgraded, the value of that investment will fall. Fixed income securities that have a lower credit rating can pay a higher level of income and have an increased risk of default. Derivative risk: Derivatives are highly sensitive to changes in the value of the underlying asset which can increase both fund losses and gains. The impact to the fund can be greater where they are used in an extensive or complex manner, where the fund could lose significantly more than the amount invested in derivatives. Emerging Markets risk: Investing in emerging markets may provide the potential for greater rewards but carries greater risk due to the possibility of high volatility, low liquidity, currency fluctuations, the adverse effect of social, political and economic instability, weak supervisory structures and accounting standards. EPM Techniques: The fund may engage in EPM techniques including holdings of derivative instruments. Whilst intended to reduce risk, the use of these instruments may expose the fund to increased price volatility. Exchange Rate risk: Changes in currency exchange rates may affect the value of your investment. Fund investing in Funds risk: The fund is valued using the latest available price for each underlying investment, however it may not fully reflect changing stockmarket conditions and the fund may apply a ‘fair value price’ to all or part of its portfolio to mitigate this risk. In extreme liquidity conditions, redemptions in the underlying investments, and/or the fund itself, may be deferred or suspended. Interest Rate risk: Fixed interest securities are particularly affected by trends in interest rates and inflation. If interest rates go up, the value of capital may fall, and vice versa. Inflation will also decrease the real value of capital. Liquidity risk: In difficult market conditions the value of certain fund investments may be difficult to value and harder to sell, or sell at a fair price, resulting in unpredictable falls in the value of your holding. Liquidity and Dealing risk: The fund invests indirectly in assets that may at times be difficult to value, harder to sell, or sell at a fair price. This means that there may be occasions when you experience a delay in being able to deal in the fund, or receive less than may otherwise be expected when selling your investment.
Investment risks
IMPORTANT INFORMATION
THE INTERVIEW
Rising to the 2022
Name xxxxxx xxxx xxxxx xxxxxxx
In addition to all the investment challenges pension funds face, there is also growing regulatory pressure to report on their environmental, social and governance (ESG) commitments and schemes can no longer ignore the importance of this in their investment decisions. In the UK, pension schemes with more than £5bn in assets had to begin reporting on the climate impact of their investments from 1 October.
Meeting ESG commitments
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Q&A
INVESTMENT PATHWAYS
Peter Rutter, Head of Equities at Royal London Asset Management (RLAM), says: “The key challenge, both pre- and post-Covid-19, is a world of low financial returns. The expected future financial returns for a range of assets are lower than they have been for 10 or 20 years.”
pathways are no longer able to provide the level of income investors require in retirement. Against this backdrop, pension investors must look for more sophisticated investment solutions to achieve their long-term goals.
ension funds in the UK are facing a plethora of challenges in today’s investment environment, many of which have been exacerbated by the Covid-19 pandemic. With interest rates at historic lows and inflation surging, traditional investment
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In such an environment, Greetham believes investors will be better off using solutions that offer greater diversification across asset classes, such as commercial property and commodities, which are more resilient to inflation. He sees it as potentially dangerous to respond to the current low interest rate backdrop by going ever further up the fixed income risk spectrum.
This adds to the complexity of the search for suitable investment solutions while keeping costs low. RLAM has been addressing this challenge head-on through the various asset classes in which it invests. In particular, its suite of bespoke actively managed equity mandates combine systematic strategies with qualitative active insights to arrive at a responsible investment solution.
“All of this can be done at low cost because of the systematic implementation and the way we have built our team,” Rutter says. “We are passionate about solving this responsible investment problem for clients, partly because of our own need within the Royal London Group.” This approach is not unique to equities but something RLAM have spent considerable time and effort in implementing across its wide range of asset solutions.
DC pensions challenge
This problem is not new, arguably, but the massive amount of central bank stimulus has ensured that interest rates will remain lower for longer, while the reopening of global economies after 18 months of lockdowns has pushed up inflation. In the UK, inflation surged to 4.2% in October, up from 3.1% in September, while the US is grappling with inflation figures of around 6%.
RLAM has learnt a lot from the Australian defined contribution (DC) pensions market when building some of its investment solutions, according to Head of Equities Peter Rutter. A more mature DC market than that in the UK, Australia began tackling the problems that the UK pensions market is facing today many years ago.
The Head of Equities explains that traditionally, some Australian superannuation schemes employed a large number of asset managers to run dedicated strategies. The problem with this approach, however, is that “by the time you have 100 active managers that’s a lot of work and complexity”. This approach also inevitably leads to increased costs. However, many Australian pension funds often look to remain active in their approach instead of seeking to lower costs through passive investing. Today, UK pension schemes are facing a similar challenge due to their need to meet ESG obligations, something that can be difficult to achieve through a purely passive approach.
Through conversations with Australian pension fund clients, RLAM has been able to begin building solutions that respond to these challenges before they developed in the local market. “I would go as far as to say that our inspiration for our low-cost active equity solutions comes from working with Australian superannuation schemes for the last 15 years,” says Rutter.
We are passionate about solving this responsible investment problem for clients
Peter Rutter, Head of Equities at RLAM
Low financial returns and a recovering economy post-Covid-19 has laid bare the fact that a simple 60/40 balanced solution can no longer meet pension investors’ needs. RLAM’s Peter Rutter and Trevor Greetham argue the need for more sophisticated solutions that can help keep pension plans on track in a new age of uncertainty
With these challenges in mind, Trevor Greetham, Head of Multi Asset at RLAM, explains that a simple balanced fund can no longer meet investors’ needs. “A 60/40 balanced portfolio is very reliant on the future performance of the US technology sector and gilts,” he says. “That kind of vehicle did really well in 2020 because tech and gilts did really well. With inflation and interest rates on the rise, we think it will pay to be more broadly diversified.”
Seeking sophistication
One of the ways to solve this problem across asset classes is by building solutions that combine a systematic approach with active insight and scrutiny, to ensure a fund can offer true ESG stewardship benefits while remaining low cost. Being a responsible investor for RLAM means remaining active, so the solutions the firm is building to tackle this problem do not compromise on this element. With the growing importance of responsible investing and increasing regulatory scrutiny across the globe, these types of solutions are increasingly sought-after by pension funds.
For professional clients only, not suitable for retail investors. The views expressed are the contributor’s own and do not constitute investment advice.
developed economies. Some challenges threaten the planet, others threaten people – three out of ten people in the world lack safely managed drinking water. (1)
he world faces diverse challenges from climate change and rising sea levels to the lack of affordable housing in
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Can bond investors help change the world?
Measurable Impact
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Campe Goodman, portfolio manager
Wellington Global Impact Bond Fund
FUND SNAPSHOT
FUND Q&A
He thinks the S in ESG – the social side – is taking on a new prominence. “Sustainable brands are made through crises like this,” says Crowdy, who co-manages the new fund with Mike Fox, RLAM’s Head of Sustainable Investments. “People will want to purchase from, and work for, companies who show they really care about their employees and broader society at critical times.”
That includes building new forms of corporate collaboration. “It’s been amazing to hear of competitor companies coming together for the benefit of society, particularly in the technology sector, where firms are co-operating to develop COVID-19 contact tracing apps, and healthcare in relation to developing a vaccine,” he says.
But just as the virus had no respect for national boundaries, Crowdy argues that sustainable investing must be similarly unconstrained. Many global sustainable equity funds are benchmarked against the MSCI World Index, a developed market index, he says, “but we thought it was more sensible and future-proof to use the MSCI All Countries World Index (ACWI) benchmark which includes emerging markets.” It’s an ongoing journey, “with about 5% of the fund invested in emerging markets, which we expect to go up towards 10%.”
Global gain
But Crowdy thinks the transition to a sustainable economy means much more than building wind turbines. “Had it not been for the development of the cloud and energy-efficient data centres, the vast majority of developed economies would not have been able to function during the crisis,” he says. He argues that companies providing solutions to a range of global problems are likely to have more attractive financials by virtue of higher, more durable revenue growth.
Positive product
Crowdy and co-manager Mike Fox work closely with “RLAM’s wider responsible investment team who particularly help us to look at corporate governance, voting and building the long-term engagement that encourages positive corporate behaviour.”
I think a more digital and connected world is here to stay, as is the need for resilient healthcare systems
Companies addressing the world’s greatest challenges should be interesting places to invest
The expected future financial returns for a range of assets are lower than they have been for 10 or 20 years
Meanwhile, asset valuations are extremely expensive compared to historical averages. The Shiller PE ratio for US equities, for example, is nearly as high as in the days preceding the dot com bubble of the late 1990s. Sovereign bond yields in developed countries, meanwhile, are hovering near historic lows.
“We have seen rapid growth of illiquid parts of the fixed income market, such as leveraged loans and infrastructure debt. These offer a better yield than gilts, but investors face potential problems in terms of credit losses when the next recession comes along,” Greetham says.
RLAM looks to solve this problem via its suite of risk-rated multi asset solutions which are tailored to where each pension saver finds themselves on the investment journey. These offerings aim to diversify investment risk across a wide range of tried-and-tested asset classes, while managing exposures tactically as the business cycle enters phases of boom and bust.
The aftermath of the Covid-19 pandemic and urgency of the climate crisis have left investors in a difficult position when it comes to saving for retirement. As traditional approaches no longer offer the necessary income, pension funds must look to more sophisticated solutions to help them achieve their investment goals while remaining sustainable in the long term.
Pension lessons from Australia
CLIMATE LEADERSHIP
The new fund complements and extends RLAM’s existing sustainable fund range
Four investment pathways to retirement
Trevor Greetham, Head of Multi Asset at RLAM
Squaring the
active/passive circle
Should sustainability
go global?
Being responsible is an active strategy, and I think it has tremendous investor and societal benefits, but it does add an expense to the chain. We have millions of pension customers in the UK and about £30bn of equities associated with them. A lot of this has been in passive, but we have recently moved that away to tilted funds that capture our new thinking in terms of how you can be responsible, but at low cost. We don’t believe you can be a leader in responsible investing and stewardship and be passive, they are contradictory concepts.
Is it possible to be a responsible investor whilst remaining passive?
An example I like to use is a US corporate which recently held a meeting in New York to discuss appropriate remuneration and incentives for its management. Of the 10 corporate governance specialists that attended the meeting, only two were active owners of the company. The rest own it because it is in an index. How can you have a conversation about appropriate remuneration and incentives for management if a large number of a company’s owners potentially don’t even know what it does? We came across this story when actively discussing remuneration in London with the same management team, whom we rate highly, and they contrasted the insight and fruitful two-way dialogue we were able to have in the interests of shareholders and society versus that New York meeting earlier that week. Without active scrutiny and understanding what you are buying, we believe it is impossible to be a properly responsible owner.
Why is there a need for active management and oversight in order to be a responsible investor?
In your Diversified Global Equity strategy and other bespoke equity solutions, how do you ensure you meet pension schemes’ ESG obligations?
First of all, there is a process of ESG integration actively applied to all stocks in our research to ensure we have scrutinised the risks and opportunities properly in order to both protect and increase client capital. When we have understood a company properly, we can then be a proper engagement participant. Otherwise, it is just a box-ticking exercise.
At the base level, we combine the active fundamental and ESG insights systematically to create a portfolio of around 200 stocks that has a relatively high active share and stock-specific risk, while maintaining a low tracking error and systematic risk. On top of this, we can include bespoke client-specific exclusions or client-led ESG objectives, such as certain carbon transition parameters. So if the clients have specific ESG thematic needs or technical needs on top of that base level ESG integration, we provide that too. All of that is supported by the systematic implementation framework we have built, which allows us to offer these solutions at a low cost (see box below).
How do you balance risks and returns in these portfolios?
That is actually entirely client led. The client will give us a tracking error budget, and we will discuss with them any particular ESG characteristics they want to include. Within that risk budget, we will implement our systematic and active insights to a level of risk and deviation away from the benchmark that fulfils that tracking error budget. So it’s a very client-centric conversation. They give us a budget, ESG themes and exclusions, we model that into the tracking error budget, and with what’s left we implement our active fundamental and ESG insights. It’s worth highlighting that the fundamental insights into forward looking shareholder wealth creation and valuation are critical to the performance potential of the client mandate but the ESG analysis is integrated into that. ESG preferences are expressed without losing access to the active alpha insights of our underlying global equity process.
How are you seeing clients use these solutions within their wider portfolios?
We have found clients approaching this in two different ways. Some use this low cost solution and then augment it with specific satellite strategies. For example, if they are worried about value outperforming, they take this core solution which is quite close to a standard benchmark, but then augment it with a value investment. They find that incredibly efficient to run. Others, however, prefer to explore opportunities to introduce specific systematic style exposures into the solutions we currently provide. We are able to do that too, by adding a layer of systematic style exposure above and beyond the underlying solution.
We don’t believe you can be a leader in responsible investing and stewardship and be passive, they are contradictory concepts
The systematic implementation of our active alpha investment process for global equities
Active global diversified process
ESG/responsible investment (RI) integration
Systematic implementation
Client specific requirements
220 actively selected stocks from proven track record of £2.4bn strategy Proprietary lifecycle approach Focus on wealth creation, cash flows and quality
Integrated into existing global equity diversified process Dedicated team of RI professionals Proactive engagement and active corporate governance
Targets a subset of global diversified Constraints minimise sector risk and maximise stock specific risk Fully embedded into independent RLAM risk framework
Customisable ESG constraints Tailored exclusions and business involvement Customisable to specified tracking error
grappling with a new challenge: that of integrating environmental, social and governance (ESG) considerations into portfolios at a reasonable cost.
n recent years, pension fund investors have pivoted from active to passive strategies in their search for cost-effective solutions and amid reports of some active funds struggling to outperform their benchmarks. However, today pension funds are
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Peter Rutter, Head of Equities at RLAM, outlines how his firm is helping its pension fund clients face these challenges in a cost-effective way through its innovative, bespoke segregated equity solutions, such as its Diversified Global Equity strategy.
Source: RLAM, for illustrative purposes only
The committee meets at least three, sometimes four, times a year and can meet virtually as well. Financial markets move fast, so if everybody internally is in agreement on an investment, we can follow our internal processes.
Do they meet often and see all your investing?
have been exacerbated by the Covid-19 pandemic. With interest rates at historic lows and inflation surging, traditional investment pathways are no longer able to provide the level of income investors require in retirement. Against this backdrop, pension investors must look for more sophisticated investment solutions to achieve their long-term goals.
ension funds in the UK are facing a plethora of challenges in today’s investment environment, many of which
We have a suite of solutions available that incorporate climate reporting and integration, as well stewardship and engagement
ESG/responsibe investment (RI) integration
Peter Rutter and Trevor Greetham
Peter Rutter on how RLAM is meeting the ESG challenge
Helping pension schemes meet decarbonisation goals
Climate leadership
A Spotlight on:
Pathways to retirement
What are the four core retirement challenges for 2022?
Investors focussed on retirement face four key challenges in the current market conditions. Each of these challenges has been exacerbated by the Covid-19 pandemic and it is important to consider them carefully before choosing a suitable retirement investment option.
PATHWAY 1
Source: RLAM, DataStream as at October 2021; property as at August 2021. ‘Multi Asset’ returns are based on the benchmark weights of Royal London Global Multi Asset Portfolio (GMAP) Growth Fund / Governed Portfolio 5. Indices used are FTSE All Share, FTSE World, MSCI Emerging Markets ESG Leaders, MSCI/AREF UK All Balanced Quarterly Property Fund, Bloomberg Commodity Index, BoAML BB-B Global Non-Financial High Yield Constrained Index, iBoxx Sterling Non-Gilt Index, FTSE Actuaries UK Index Linked Gilts, Bloomberg Barclays UK Government Inflation Linked Bond 1-10 year Index, Bloomberg Barclays World Government Inflation Linked Bond (ex UK) 1-10 year, FTSE Actuaries UK Conventional Gilts Index, FTSE Actuaries UK Conventional Gilts up to 5 Years Index, SONIA. Total returns in sterling terms.
RLAM offers investment solutions that suit each of these pathways and allow investors to maximise returns in line with their preferred level of risk. But at the same time, RLAM’s solutions look to mitigate some of the key challenges faced by those investing for retirement in the current market environment and protect their returns on the downside. We explore how in more detail over the next few pages.
arlier this year, the Financial Conduct Authority (FCA) set out four investment pathways for retirement, based on how soon an investor is looking to cash out his or her pension pot and what they want to do with their money.
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FCA Investment Pathways
I have no plans to touch my money in the next five years
I plan to use my money to set up a guaranteed income (annuity) within the next five years
I plan to start taking my money as a long-term income within the next five years
I plan to take out all my money within the next five years
Option 1
Option 3
Option 2
Option 4
Expensive valuations globally Real interest rates on government debt are negative, credit spreads are tight and the cyclically-adjusted price earnings ratio for US equities is at its highest level outside of the dot com bubble.
Scarcity of natural income Yields on a wide range of assets have been extremely low since the 2008 financial crisis. Therefore it is difficult to amass enough capital to live off coupon and dividend income in retirement.
Higher inflation UK CPI hit its highest level in a decade in October, at 4.2%, with US inflation around 6%. While inflation is likely to subside somewhat, massive monetary and fiscal stimulus during the Covid pandemic has raised longer term inflation risks.
Negative real interest rates The yields on many fixed income securities are below the rate of inflation and below the Bank of England’s 2% inflation target. Given the vast amounts of debt accumulated by governments, so-called ‘financial repression’ is unlikely to end soon.
Trevor Greetham, Head of Multi-Asset at RLAM, believes the industry as a whole has responded to the scarcity of natural income by moving further and further out on the risk and liquidity spectrum within fixed income. However, the Covid crisis may have taught people the wrong lesson: that central banks will always bail out investors.
“The Covid crisis was a deflationary shock. The next recession could be more ‘normal’, triggered by interest rate hikes to reign in a gradual build-up of inflationary pressure”, he says. “Central banks will not respond to every market wobble with additional liquidity if they are in inflation fighting mode and investors will have to work harder to avoid credit losses. We believe broad diversification beyond stocks and bonds is called for. We include assets like commercial property and commodities which have historically been more resilient to inflation, along with a tactical asset allocation approach to adjust the asset mix as the business cycle evolves.”
“This is for savers who would like to stay invested for at least five years, but perhaps no longer. For us this means diversifying broadly, with a moderate degree of capital risk, and making sure you have asset classes in the portfolio that are resilient to inflation. We would suggest the lower risk portfolios within the Royal London Governed Range, for pensions, or the equivalent Global Multi Asset Portfolios or ‘GMAPs’.
“Simple balanced funds are overly reliant on US growth stocks and UK long duration bonds and they could be hit really hard as interest rates rise. In our portfolios we invest as much in UK equities as in the US, which gives more even sectoral exposure and a greater weight to value sectors that tend to do better when inflation is rising. We improve inflation resilience further with allocations to UK commercial property and commodities; and we have much less bond duration than most, favouring shorter-dated high yield and investment grade bonds.”
Diversify assets to provide a smoother investment journey
“This is for savers who have decided to convert their pension pot into a guaranteed lifetime income or annuity. In this case, within Governed Range pensions we offer the Annuity Fund, which maps across to the GMAP Conservative Fund.
“This pure fixed income portfolio invests in the same sorts of bonds that back annuities but with more active credit management and a degree of tactical asset allocation. Annuities are a fantastic insurance against longevity, but you are locking in negative real interest rates for the rest of your life.
PATHWAY 2
PATHWAY 3
“This is for savers planning to use their portfolio to generate a long-term income at some point over the next 5 years. For this reason, investors require an appropriate balance between growth and capital preservation. We offer the Governed Retirement Income Portfolios for pension investors, a range of risk-rated multi asset funds intended to maximise the sustainability of retirement income.
Another potential solution is RLAM’s Multi Asset Strategies Fund (MAST). This fund aims to capture upside during positive market trends while reducing equity exposure during periods of turbulence to limit downside risk. This may be attractive for decumulation applications where reducing sequencing risk is critical.
MAST simulated cumulative returns in up and down markets (%)
Source: RLAM. Returns from 1995 Q2 to 2021 Q2. Simulated data is used prior to the inception date of November 2018. The simulation assumes fixed weight allocations to Multi Asset Core, with volatility management and constant risk budget for Tactical Overlay. The simulation for MAST is calculated using historical positions generated by RLAM’s in-house tactical asset allocation models and signals from our volatility management process. Net of estimated transaction costs.
For illustrative purposes only. The above chart contains simulated performance data. Simulated performance data is not a guide to past or future performance.
PATHWAY 4
“This is for savers who want to take all of their money out within the next five years as a cash sum – and it could be tomorrow. A low risk multi-asset fund could be an option here but we also offer a wide range of cash funds at RLAM which invest a little bit further out on the risk spectrum in an effort to improve returns. Capital preservation is key but we look for solutions that can add some value. The risk with Pathway 4 is inflation, especially if the money ends up sitting in cash for years. Real interest rates are negative and money kept on deposit has lost the same amount of purchasing power since 2008 as it would have over the inflationary 1970s.”
UK real interest rates and the real cumulative return on cash
Past performance is not a reliable indicator of future results.
Source: Refinitiv Datastream as at 23 September 2021
“Our solution is designed to track annuity rates to a reasonable degree, giving some predictability of retirement income, but we seek to improve the income on offer by managing the assets actively.”
RLAM’s solutions look to mitigate some of the key challenges faced by those investing for retirement in the current market environment
soon an investor is looking to cash out his or her pension pot and what they want to do with their money.
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“The fund launched in 2018 but simulated returns back to the mid-1990s suggest the strategy would capture around half of the upside during rising equity markets while suffering only around 10% of the downside on average during the sort of persistent periods of high volatility associated with recessions.”
Name xxxxxx xx xxxxxxx
How is the focus on climate change impacting where and how pension schemes invest in 2021?
Ultimately, we want to make sure that whatever assessment we do is as close to the science as possible. Some stress testing models are very rigid as these don’t have the flexibility to conduct sensitivity tests. We remain independent on how we select our models, but we are moving away from backward-looking metrics and carbon footprinting.
How are you incorporating and reporting on climate transition goals in particular?
If we want to make net zero by 2050 a reality, we have to at least have an awareness of where the portfolios are and then have the tools at our disposal, mainly through stewardship, to get the appropriate targets and strategies in place to ultimately reduce a company’s emissions.
For me, the need for decarbonisation to tackle climate change is very clear, and there are some really ambitious policies coming out. But I think there is still an element missing. Perhaps we are relying too much on policy intervention. The way I like to think of it is this: we are never going to go back to whale fat to light our houses, because we have coal; and coal will never compete with gas in the US, because gas is cheaper.
What changes need to happen to accelerate the transition to net zero?
DC pensions and the
The issue at the moment is that we are forcing certain requirements because the technology is not quite there and we lack the economic interventions to push the market to really ramp up that innovation. So my dream would be a global carbon price or some sort of economic intervention that would kick start market innovation. At this stage, we are unable to drop all fossil fuels tomorrow, so we need that next technological breakthrough. And I think at the moment through policy alone we may be failing to ignite those kinds of innovative brains to come up with the next industrial revolution, the decarbonised industrial revolution. But I am an engineer and retain optimism that we will head in the right direction.
RLAM’s Independent Advisory Committee
What is the purpose of the Independent Advisory Committee?
Fossil fuels is a big one. We get asked about that a lot but we say: What exactly do you mean by ‘fossil fuels’? Fossil fuel extraction, power generation, or services companies?
What sort of special issues?
How to invest in emerging markets is the obvious one. Can you really be a global sustainable fund and miss out China, India, and Latin America?
We sometimes even apply different standards within developed markets. For example, we have a strong preference for diverse boards. But a diverse board in Japan could be one that has a single female member. In the UK we would probably vote against that.
Do you apply different standards in developed versus emerging markets?
Firstly, the crisis offers a proof point as to why we invest in companies that solve rather than cause problems. For example, we own companies involved with the UK testing strategy and the effort to develop effective treatments.
journey to climate leadership
What we are hearing loud and clear is that there is an appetite for products and services that help our clients satisfy their own commitments and objectives. On a portfolio level, they are asking us to provide information that helps them disclose how they are performing against these targets. To respond to this need, we have been integrating more information on the climate performance of investment solutions, doing more stress testing, and using forward and backward-looking metrics to gain a snapshot of our funds. Some investors might require full exclusions, so we work with them to create segregated accounts where they have full control of how the portfolio is constructed.
To start off with, we have a conversation with the client to understand what they are interested in. We have a suite of solutions available that incorporate climate reporting and integration, as well as stewardship and engagement. We’re constantly refining this to reflect both growing client demand for decarbonisation and to reflect our own capabilities and commitments such as joining the Net Zero Asset Managers Initiative.
How do you ensure your portfolios are aligned to pension scheme goals as well?
We have a full suite of sustainable funds, and also provide tilting opportunities in passive funds. We have seen particular interest in a hybrid passive/active approach with enhanced governance at a minimum. As a medium-sized asset manager, we are able to use our aggregated holdings to enhance stewardship even in passive strategies. And then, for those clients that have a strong view on a particular issue, we can also integrate exclusions.
We now have two full functions dedicated to engagement and proxy voting and they work very closely together. In terms of voting, our climate and governance specialists are voting on all climate issues, both shareholder and management, which we believe is very important.
How is your approach to ESG, stewardship and engagement evolving and what does this mean for your investments?
On the engagement side, we are aware that one of the biggest sector exposures for us climate-wise is utilities and we have taken an innovative approach to this. In our view, although this sector contributes highly to overall emissions, it is also part of the solution. We really believe the whole economy will pivot to a decarbonised future partly through electrification.
When it comes to utilities, firstly we require the sector to decarbonise faster in line with what the IPCC and International Energy Agency Net Zero 2050 models show. At the same time, we support the concept of a ‘Just Transition’ to take into account the social issues that could potentially slow down the energy decarbonisation. We have launched our own pioneering Just Transition initiative with utility companies to tackle the environmental, but also the potential social externalities of decarbonisation.
Head of Engagement at RLAM, discusses the challenges pension schemes face, RLAM’s engagement activities and adapting portfolios to meet long-term decarbonisation goals.
ncreasing climate regulation and pressure from clients are pushing DC pension schemes towards investment solutions that incorporate climate reporting and mitigate the risks climate change poses to investment assets. Carlota Garcia-Manas,
For further information on RLAM’s range of products and services, please contact: EMAIL: institutional@rlam.co.uk PHONE: 020 7506 6500 WEBSITE: rlam.co.uk
