Whether it’s Brexit or Pensions ISAs, schemes need to bite the bullet and come up with a plan of action
Pensions schemes gathered together at the EICC for the annual PLSA Investment Conference. They were there to discuss and the debate the investment issues that should be top of trustees or scheme managers’ minds.
What stood out, for me, was that the many of the threats facing the investment industry come not from the investment and pensions landscape but from the outside world.
Climate change, Brexit and regulatory uncertainty came up in session after session. And what was clear is that the industry as a whole needs a better collective response to the regulatory threats it faces.
Outside the venue just before the main climate change session, I overheard one trustee saying: “Earlier they were asking what keeps us up at night, climate change puts me to sleep, I’m heading back to the hotel.”
It’s possible he was being flippant, but actually I think this characterises a lot of people’s response to the issue of climate risk. They think ‘it’s an ESG issue, I have a fiduciary duty to maximise investments, it’s just not high on my agenda’.
The industry as a whole needs a better collective response to the regulatory threats it faces”
But that view is out of touch. One theme that emerged from the conference was that climate change really should be on trustee’s priority list. Because it’s not just an ethical consideration – it’s an investment one. And across a number of sessions experts suggested that decarbonisation will be priced into the markets and some asset classes may do better than others.
So if trustees have a fiduciary duty to do well for members, they had better work out which assets are which, and invest and hedge accordingly.
Brexit is another issue that seems like it should be beyond a scheme’s purview, but there are obvious investment consequences. Even the debate itself is making markets jittery and a decision either way is likely to have implications for stock markets across the globe.
Beyond the FTSE, it is also true that the decision on the EU will have repercussions on the business environment and regulatory framework that pensions operate in.
Never forget how important the business and economic argument was in the Scottish referendum”
The industry needs to think on this and decide what would be for the best. That’s not enough though. It also needs to communicate its viewpoint with government, media and the general public.
Never forget how important the business and economic argument was in the Scottish referendum. Pension schemes can make a difference if they communicate their beliefs in a meaningful way.
Schemes should also run risk scenarios on either decision, and work out how to protect their members’ assets for whichever decision comes to pass on the 23 June.
Helena Morrissey, the chief executive of Newton Asset management, made a good point in her Q&A session. She said: “I’m quite worried that we will have very significant unforeseen consequences [for the post-financial crush monetary policy].
“I don’t blame policy-makers… but what was emergency A&E treatment has not become everyday medicine.”
And whether interest rates will ever recover is not the on regulatory uncertainty that schemes must deal with.
Other considerations include if and when the axe will fall on tax relief (and crucially how much warning will we get), whether the Regulator will push harder on DC consolidation and whether the charge cap could be applied to decumulation, dropped to 50bps or extended to DB.
How do you plan for the future when you don’t know what the future will hold?”
For schemes – this uncertainty can make life extremely difficult. After all, how do you plan for the future when you don’t know what the future will hold?
What all of the issues above have in common is that they are beyond a scheme’s control. So scenario planning will become ever more important, as will finding better ways of using data to understand the risks. Schemes will also have to start thinking about how some of these risks can be hedged to best protect members’ interests.
It’s a difficult time to be a trustee or scheme manager, but it’s also an interesting one. And where there is risk – there are always opportunities. The schemes who understand these issue and act accordingly, will be the ones that can capitalise on them.