The London borough of Hackney has committed its £1.1bn (€1.3bn) pension fund to becoming free of fossil-fuel investments in the long term.

The move starts with a six-year plan to cut the fund’s exposure to the carbon-producing assets by 50%, the council announced today.

The council said: “This radical move follows a review which looked at the financial risks posed to the pension fund’s fossil fuel investments in light of the Paris Agreement, a global action plan to help limit global warming.”

The pensions committee chair, Councillor Robert Chapman, described climate change as “probably the greatest threat facing humankind”.

He said: “There is also a threat to our pension fund in that investments in fossil fuel assets become stranded, which means that they’ll lose their value as a result of necessary world-wide action against climate change.”

Hackney was the first London borough to set itself a clear risk reduction target within a realistic amount of time in order to make the necessary changes with the minimum of risk, he said.

But Chapman cautioned that the council had to make sure any changes to how the pension fund was managed were made extremely carefully. 

“Our first responsibility is towards those whose pensions we manage as well as other stakeholders, which include local council taxpayers,” he said.

In other news, the Pensions Regulator (TPR) reported that membership of defined contribution (DC) schemes had overtaken that of defined benefit (DB) schemes for the first time.

In its latest annual DC Trust report, TPR said there were now around 14.8m memberships of DC schemes, compared to 11.7m DB arrangements.

Andrew Warwick-Thompson, executive director for regulatory policy at TPR, said: “We have now passed a significant point in UK private sector pensions provision with 55% of all private sector pension scheme members and 85% of active members being participants in DC schemes.”

This big change was directly due to the success of the automatic enrolment system (AE) introduced in the last few years, he said, which had seen more than 7m workers join a pension scheme for the first time.

“Master trusts have played a major role in the success of AE and so the introduction of a mandatory authorisation and supervision regime via the Pension Schemes Bill is vital,” Warwick-Thompson said.

The regulator now needed to make sure there there was “a level playing field” for the protection of consumers investing in contract-based and trust-based multi-employer pension plans, he said, adding that it was clear market forces alone would not have made this happen.

Meanwhile, DB pension funds looking to offload liabilities to bulk annuity providers may find lower prices this year due to greater insurance capacity, according to a new report.

But they face continued competition from insurance companies seeking to offload risk, Willis Towers Watson said in its 2017 de-risking sector report.

Last year was relatively quiet compared to 2015 in terms of pension schemes passing longevity risk to insurers. However, several insurers passed on back books of annuity business to other insurers and reinsurers, such as Aegon’s sale of its £9bn annuity portfolio to Legal & General and Rothesay Life.

Ian Aley, head of transactions at Willis Towers Watson, said: “It is not just pension schemes that are competing in the longevity risk market, and the market as a whole has been as busy as ever, if not busier in some cases.

“Looking forward there may be continued competition from back-books, with rumours that Prudential has recently started the sales process for its £45 billion pension liabilities operation, including its annuity business.”

However, one of the report’s authors, Sadie Scaife, said that the longevity risk market would give “well-prepared buyers” access to attractive pricing terms.

Pension schemes offloading liabilities this year were now likely to find cheaper deals, she suggested, as much of the insurance sector’s risk reduction was complete.

“The longevity hedging aspect of this activity was largely completed by the end of 2016 and we therefore expect pension schemes carrying out transactions in 2017 to benefit from an excess of supply and consequent lower costs,” she wrote in the report.

But this trend was not sustainable in the long term, Scaife warned, because of the size of UK defined benefit (DB) pension liabilities and the rate at which they are maturing, she said.

“A recent survey of our clients showed that 50% expect to reach their end-game target in the next ten years,” she said. “Regardless of whether this is in the form of self-sufficiency or buyout, longevity risk protection may well be needed.”

Topics