Climate Change Risk a Threat to Scottish Pension Funds

Two Scottish pension funds with a combined £27.1 billion ($35.1 billion) in investments are failing to address “major risks” from climate change, according to a new report from environmental group Friends of the Earth Scotland.

The report said the Lothian Pension Fund and the Strathclyde Pension Fund, which are run by the Edinburgh and Glasgow Councils, have an estimated £803 million and £153 million invested in fossil fuel companies, respectively. And although the pensions raised climate change issues with the companies they invest in, the report said the funds have not set any clear objectives.

While the pension funds claim to be addressing climate risk through shareholder engagement with fossil fuel companies, the group said their approach of asking fossil fuel producers such as BP and Shell to become more climate-friendly is often in direct contradiction to the oil companies’ business plans.

“Lothian and Strathclyde Pension Funds are not doing enough to protect pension holders from the risks associated with climate change,” Ric Lander, divestment campaigner with Friends of the Earth Scotland, said in a release. “Those running our pension funds are still banking on Big Oil, fracking, and coal to fund our pensions in the decades to come. This strategy is just not credible.”

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The report examined the 17 largest local government pension funds (LGPF) in England and Scotland, as well as the Northern Ireland LGPF, and Rhondda Cynon Taf, which is the largest Welsh LGPF. The group noted that the Waltham Forest, Southwark, and Islington LGPFs have committed to divest from all fossil fuels while Hackney, Haringey, and the Environmental Agency Pension Fund have made partial commitments to divest from fossil fuels.

While the report found Scottish funds were lagging behind regarding addressing climate change risk, it also found that English funds, including Merseyside, Lancashire, London, and Avon local government pension funds “were found to be pushing ahead.” The group lauded those funds for reducing their exposure to risky companies, and setting clear goals for engaging with the companies they invest in.

Lothian Pension Fund’s “responsible investment” policy acknowledges that environmental, social, and governance (ESG) issues can affect a company’s financial performance, and that it has “a responsibility to take these issues seriously.” However, it also said that it does not disinvest from companies for “purely non-financial reasons,” and prefers to engage with companies to ensure responsible investment.

“This is because engagement, particularly in collaboration with other asset owners, can lead to positive change in corporate behavior and strategy,” says the fund. The pension argues that divestment is “less responsible” because if all responsible investors divested their shares, there will be no owners challenging boards on their strategies.

And the Strathclyde Pension Fund says that it has incorporated ESG in its investment strategies for more than 20 years, having first developed its corporate governance strategy in 1995, and its first socially responsible investment strategy in 2000.

It also said it became a signatory to the United Nations Principles for Responsible Investment (PRI) which encompass ESG issues, in 2008, and in 2015 joined the Local Authority Pension Fund Forum, which promotes corporate social responsibility.

Tags: Climate Change, ESG, Lothian Pension Fund, Scotland, Strathclyde Pension Fund

Despite already feeling the financial strain from their obligations to public pensions, state and local governments can expect to face increased commitments to their retirement systems as investment return assumptions have fallen to an all-time low this year.

According to the National Association of State Retirement Administrators (NASRA), nearly 75% of the 128 public plans it has tracked have reduced their investment return assumptions since fiscal year 2010, which has resulted in an all-time low median investment return assumption of 7.45% as of November, from 8% eight years earlier.

Since 1987, public pension funds have accrued approximately $7 trillion in revenue, said NASRA, of which $4.3 trillion, or 61%, is from investment earnings, with 27%, or $1.9 trillion, coming from employer contributions, and the remaining 12%, or $844 billion, coming from employee contributions. Because public pensions rely on investment returns for a majority of their revenue, the lower the investment returns are, the more governments will have to spend to cover the shortfall.

Of the 128 public pension plans tracked by NASRA, only six still have investment return assumptions at the 2010 median of 8.0%, which is the highest assumed rate of return among the plans, and only 22 have assumed rates of returns of 7.5% or higher. A majority of the plans (69) have assumed rates of return that range between 7.0% and 7.5%, and 37 plans have assumed rates that are 7.0% or lower. Kentucky’s Non-Hazardous Employee Retirement System pension registered the lowest assumed rate of return at 5.25%, and was the only plan among the 128 with an investment return assumption below 6.25%.

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Among the more high-profile pension funds lowering their investment return assumptions this year were the North Carolina Retirement Systems, which cut its assumed rate of return to 7% from 7.2%, the Teacher Retirement System (TRS) of Texas, which reduced its assumed rate of investment return to 7.25% from 8%, and Minnesota’s state pension, which cut its assumed rate of return to 7.5% from 8%. New Jersey also said it would lower its investment return assumption to 7% in fiscal 2023, after temporarily raising it to 7.5% from 7.0% in fiscal 2019

Tags: Assumed Rate of Return, National Association of State Retirement Administrators, Pension

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