Sustainability Charter for the bulk annuity process

By Cléo Fitzsimons, Head of Sustainability

The Sustainability Principles Charter is underpinned by four key principles that form the foundation of sustainability within the bulk annuity process. These principles serve as a framework to ensure that sustainability considerations are consistently integrated into investment decisions and stewardship activities.

• Transparency: Pension insurers are expected to openly disclose their values, principles, and investment beliefs related to sustainability. This allows trustees and policyholders to understand the full extent of how their assets are being managed
• Integration of sustainability in decision-making: BPA providers must demonstrate how sustainability factors are considered in their investment analysis and overall stewardship activities
• Reporting and engagement: The Charter mandates continuous reporting and engagement with stakeholders, such as pension schemes and advisers, on sustainability commitments. This ensures that transparency extends beyond the point of transaction and into the long-term management of assets
• Collaboration: Ongoing collaboration within the pensions sector to promote industry progress as responsible investment best practices evolve

The Benefits of the Charter

One of the key advantages of the Charter is its focus on levelling the playing field between specialist BPA insurers and larger insurers with asset management counterparts. The Charter recognises that sustainability reporting for insurers operating in the BPA market should focus on Matching Adjustment (MA) portfolios, which are critical for the bulk annuity business. This means larger insurers must report on their BPA-related activities separate from the group level while specialist insurers already separate MA from non-MA activities. Hence, this approach ensures that all players in the BPA market are held to the same sustainability standards, fostering fair competition.

The Charter also has the potential to simplify the often-complex reporting requirements that BPA insurers face. If adopted as the baseline for sustainability reporting, the Charter would aim to provide a clear framework for advisers conducting annual surveys and assessments. Rather than requiring BPA players to respond to varying and often overlapping sustainability queries, advisers should be able to refer to the Charter as a standardised point of reference.

Another major benefit of the Charter is its ability to unite the BPA industry in a collaborative effort to promote sustainability. By fostering dialogue and cooperation across the pensions sector, the Charter encourages all stakeholders to share best practices and drive collective improvements in responsible investing.

Thanks to the Charter, insurers, pension funds, and advisers will play an increasingly critical role in ensuring that pension investments are resilient to climate change, environmental degradation, and social inequality.

PIC actively shapes sustainability efforts in the pensions industry

At PIC, we have long been advocates of embedding sustainability into the heart of the BPA process. We are proud to have played an instrumental role in shaping the Charter. By keeping the standards realistic yet ambitious, we believe it sets a new benchmark for sustainability that is practical and impactful.

PIC was a strong advocate for ensuring that the Charter focused on actions that are achievable within MA portfolios. Given the complexity of managing MA assets, PIC played a key role in shaping the Charter so that the sustainability standards required are specific to the insurance arm of the business rather than being applied at a firm's broader group level. This distinction was crucial, as it ensured that the Charter’s sustainability commitments could be met in a way that aligns with the regulatory requirements and operational realities of bulk annuity insurers.

PIC played a pivotal role in shaping the Charter by providing constructive feedback during its development. In particular, PIC highlighted that certain expectations from trustees, as outlined in earlier drafts, were not feasible within the current regulatory and operational framework of bulk annuity providers. For instance, there was a request for signatories to offer transacting pension schemes segregated accounts, allowing trustees to apply their own ethical exclusions. PIC advised that while this concept was well-intentioned, it was impractical due to the complexities involved in managing individual Matching Adjustment (MA) portfolios with customised exclusions for each scheme.

Furthermore, PIC provided insights on the issue of transparency around investments in specific sectors at various revenue thresholds. While PIC recognised the importance of transparency, it emphasised that fully bespoke screens could not be applied to master MA portfolios if schemes wanted to achieve favourable pricing. Instead, PIC advocated for more realistic transparency measures, such as reporting based on standard thresholds (e.g., a 10% coal revenue threshold). This balanced approach ensured that the Charter remained both ambitious and achievable, allowing insurers to meet sustainability commitments without compromising the integrity or efficiency of the bulk annuity process. 

Conclusion

The pensions industry has a vital role to play in driving positive change. The Sustainability Principles Charter represents a significant step forward in ensuring that pension investments are able to contribute to a more sustainable and equitable future. For trustees, advisers, and insurers alike, it offers a clear path to align expectations so that more efficient efforts can be made to drive forward towards long-term sustainability goals—ultimately benefiting both current and future generations of pension scheme members.

This article previously appeared in Insurance Asset Risk (paywall): Sustainability Charter for the bulk annuity process : Insurance Asset Risk