UK Pension Plan Invests £130 Million in Environmentally Aware UBS Fund

The UK’s National Employment Savings Trust (NEST) is investing £130.3 million ($159 million) in a new climate-aware fund managed by UBS Asset Management “to respond to the investment challenges of climate change and the global transition to a low-carbon economy.”

NEST is a defined contribution workplace pension plan set up to facilitate automatic enrollment as part of the government’s workplace pension reforms. The new UBS Life Climate Aware World Equity fund is managed by UBS Asset Management and developed in partnership with the NEST in-house team. The fund’s goal is to provide returns similar to the FTSE Developed Index, and has a rules-based investment approach with three key features:

It increases investment in companies identified as vital to combating climate change

It reduces investment in companies that are heavy carbon emitters, have fossil fuel reserves, or are not making changes needed to meet emission reduction targets

It concentrates voting and engagement activities on improving companies that most need to adapt their business models in order to meet climate-change goals.

“As responsible long-term investors on behalf of our members, we can’t afford to ignore climate-change risks, and we’ve committed to being part of the solution,” said Mark Fawcett, NEST’s chief investment officer. ‘Today, we’re taking a vital step towards readying our members’ portfolios for a lower carbon future.”

The fund targets at least 40% higher exposure to companies that generate renewable energy and supporting technology, a 30% tilt toward companies most aligned to meet industry carbon reduction targets in line with the 2 degree scenario; and with a 50% reduction in carbon intensity.

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“This combines innovative rules to overweight those companies making a positive contribution towards limiting climate change,” said Ian Ashment, head of systematic & index investments at UBS Asset Management, “and reducing carbon while under-weighting those which are least aligned to meet industry carbon-reduction targets.”

NEST is allocating 30% of the equities in the Foundation Phase of its NEST Retirement Date Funds to the UBS Life World Equity Tracker Fund. NEST said that because younger plan members have a longer investment time horizon, and are more likely to be impacted by the transition to a lower-carbon economy, it is investing the fund in different proportions based on the maturity dates of the NEST Retirement Date Funds. As a result, younger members will have greater exposure to this fund than older members.

“The launch of NEST’s new climate-aware strategy is a great example of how investors can incorporate climate issues into their portfolios to enhance returns,” said Fiona Reynolds, managing director of the Principles for Responsible Investment (PRI). “We need to remember that while climate change presents risks to portfolios, it also presents opportunities. Investment vehicles that recognize this fact will be welcomed by investors.”

By Michael Katz

Resolving the unfunded pension liabilities for auto workers at General Motors Company’s European operations proved to be the key to success in the $2.3 billion sale of GM’s European operation to Peugeot owner, PSA Group. The sale would make PSA the European Union’s second-largest car manufacturer, second to Volkswagen.

The $2.3 billion sale was delayed as negotiations continued to resolve the $10 billion in pension liabilities to about 15,000 Vauxhall and Opal auto workers, as well as other considerations. In the earlier stages of the negotiations in March, PSA’s position was to have GM =assume responsibility for the unfunded liability.

As a result of the sale, GM will assume much of Opel’s pension obligations and will pay PSA about $2.93 billion to settle pension underfunding. The sale will give GM about $2 billion in cash, which it plans to use in a buyback plan, according to news reports.

The pension issue became so important that David Whiston, an auto analyst with Morningstar Inc., said “pensions are one of the reasons that, if you’re PSA, you don’t want to do the deal. There may be a way to get it done if GM keeps the obligation, but PSA gives them cash.”

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In its 10k filed on Dec. 31, 2016, GM said its non-US pension obligations stood at $24 billion, with unfunded liabilities of $11 billion. About $10 billion or 91%, of those unfunded liabilities were to workers in Canada, Germany and the UK.

Unlike the US, which has mandatory pension funding requirements, funding a pension in Europe does not require regular cash infusions. As a result, injecting more cash into the pension plan is not something PSA wanted to do.

Auto analysts said the deal would be good for GM if it could extract itself from the pension funding problem, while also unloading an operation that was losing money. A proposal reported by Bloomberg earlier this month said PSA was willing to pay about $2 billion for Opel and Vauxhall. This amounted to $1 billion for the purchase and $1 billion being directed toward pension liabilities, but the bulk of the unfunded liabilities would be borne by GM.

GM’s 10k also said the company had injected $3 billion more into its non-US pension plans over the past three years, with a large portion going into its European pension liabilities. GM plans to put another $970 million into non-US pension plans in 2017, according to the 10k filing.

GM is largely exiting the European market, but will continue to produce Chevrolets. GM has owned Opel for almost 90 years, but decided to sell after the company failed to break even in 2016. It also has lost about $9 billion from its European operation since 2009. Other factors prompting GM to exit Europe were uncertainty about Brexit, the possibility of new trade tariffs and the very thin profit margins that exist on the production of autos in Europe.

By Chuck Epstein