Administrators of DB pension plans must consider insurers’ ESG capabilities, says Hymans Robertson

A new report from Hymans Robertson indicates that insurers’ ESG capabilities are a growing priority for DB pension plan administrators considering buyouts and buyouts.

The firm said trustees need a “critical understanding” of the role of ESG in order to take full advantage of it. The report, Spotlight: ESG in Risk Transfer Transactions, outlines four key areas of responsible investing that trustees should use when evaluating a potential insurer to partner with. These are: Culture, Inclusiveness, Stewardship, and Transparency which, when considered together, can help directors develop a longer term vision that was not necessarily encouraged by previous guidance.

Paul Hewitson, Head of ESG for Risk Transfer at Hymans Robertson and author of the report, said: “The primary duty of a DB trustee is to act in the best interests of its members and, for pension targeting buyout, part of that is partnering with insurers that they believe can meet the responsibility of paying benefits for its members over the long term. Trustees are now required to consider the risks and opportunities to their regime that climate change will bring over appropriate short, medium and long-term time frames Past guidance has traditionally focused on significant short-term risks, and not necessarily on an explicit consideration of the longer-term impacts of ESG factors and climate change.

Defined benefit pension plans are plans in which the benefits of a pension are clearly defined from the start, usually calculated as a percentage of final or average earnings throughout an employee’s career. The benefits of a defined contribution plan, on the other hand, are based on the performance of the investments underlying the retirement portfolio. Defined benefit plans are generally considered to be financially more onerous for employers and for this reason have lost popularity in recent years.

He added: “As it is likely that emerging risks like climate change could also affect the future financial strength of insurers, fiduciaries should take the time to understand how an insurer integrates ESG factors and climate-related risks into its standard process and its investment decision making. They can then compare an insurer’s approach with that of their own system, which will ultimately help them feel reassured that any risk transfer transaction will be in the best interests of members over the long term.

He concluded, “As insurers continue to focus on responsible investment factors and follow recommended disclosures, fiduciaries will have even more information to identify differences and compare potential partners. Insurers disclose things like how they invest in socially beneficial projects and low-carbon initiatives, how they reject investments involved in controversial activities, or how they actively engage with companies they invest in to drive positive change from an ESG perspective.