Pensions - Articles - Pension schemes ESG implementation and covenant management

Regulatory complexity in the pensions industry shows no sign of abating, while the pressure to take climate action has become greater than ever before. Against this backdrop, Janus Henderson Investors commissioned some new research from mallowstreet to help understand some of the challenges the industry and in particular trustees face.

 The objective of this research, which surveyed over 160 trustees and pension professionals across 156 schemes, was to identify ways in which managers and advisers can better support trustees, especially when it comes to ESG implementation and covenant management.

 The research covers a broad array of topics including:

 i. Trustee satisfaction and challenges –growing regulatory complexity is the top challenge for 79% of trustees. Increased ESG requirements are a key contributor, but all top industry concerns reflect recent regulatory changes.

 ii. Monitoring and mitigating the risk to the employer’s covenant – despite its importance to endgame journey planning and the maintenance of funding levels, the survey found just 12% of schemes see covenant risk as material to their endgame journey.

 iii. Implementation of ESG strategy and reporting metrics – the industry is still developing best practice in climate reporting with 85% of large schemes facing major issues with data availability. However, just 3% of all schemes say climate change risk will have a material impact on their ability to pay pensions.

 The extensive survey also explores the link between the strength of the employer’s covenant with a scheme’s investment strategy and ESG implementation. Almost half of schemes with a trigger-based investment strategy would reduce investment risk should the employer’s covenant deteriorate. It was also found that the focus on ESG implementation was dependent on the strength of the employer’s covenant.

 Anil Shenoy, Head of UK Institutional at Janus Henderson Investors said: “We are delighted to work with the expert team at mallowstreet to design this survey to help the industry better understand the pressures facing trustees, particularly around ESG implementation and covenant management. The employer’s covenant is key to a pension scheme achieving its primary obligation to pay pensions as they fall due. Therefore, an understanding of the employer’s covenant is crucial as part of an integrated approach to pension risk management and influences the level of investment and funding risks that a scheme can sustain.
 “As an active fund manager, Janus Henderson Investors analyses individual companies at a fundamental level, taking account of a variety of different factors such as changing regulation, technological advances, competitive dynamics and ESG risks. The influence of these factors varies on sector-by-sector basis and the pace and potential for change has accelerated since the pandemic. This has increased the risk of an unexpected deterioration of a particular employer’s covenant and this survey highlights the importance of ensuring this risk is carefully monitored.”

 Stuart Breyer, CEO at mallowstreet, said: “The roles of trustees and pension boards have changed significantly in the past two years. Macroeconomic, geopolitical and climate risks have increased dramatically, confronting trustees with new challenges they have not faced before. As a result, we developed the mallowstreet Trustee Survey in partnership with Janus Henderson to understand the current trustee landscape. Together with the APPT, PLSA, PMI and AMNT, we have collected over 160 responses across the industry, which we have collated into a free downloadable report. We hope that by making this research accessible on to all industry professionals, we can stimulate discussion on the challenges they face. And together, we can work towards a better retirement for everyone.”


 Full Report

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