 By Ross Fleming, Co-Head of Trustee DB Investment and Elaine Torry, Co-Head of Trustee DB Investment from Hymans Robertson
Action for Trustees
Focus on reviewing aspects of your Scheme’s investment arrangements which have LIBOR exposure to ensure there is a plan in place to implement the transition smoothly and the amendments are adequately updated in Scheme investment documentation.
This could be in the form of:
Ensuring your Scheme's investment manager benchmarks are updated and any performance targets are adjusted fairly (e.g. Investment Management Agreements);
Any asset holdings which are directly linked to LIBOR are updated accordingly so that the Scheme's assets are adjusted accordingly (e.g. LIBOR floors);
Derivative holdings, including within a Scheme's LDI portfolios which have residual links to LIBOR (e.g. interest rate swaps, including offsetting derivatives which may have gross LIBOR exposure even when there is net zero LIBOR exposure); and updating approaches to liability valuations and benchmarks for Schemes which have a swap-based discount rate.
Responsible Investment – Taskforce for Climate-Related Financial Disclosures (TCFD)
2020 saw the launch of the consultation which will require Schemes to introduce governance arrangements to address climate risk and provide public reporting in line with the TCFD framework. These governance requirements will kick in for the largest pension Schemes on 1 October 2021 (>£5bn of assets) and Schemes with over £1bn of assets affected from 1 October 2022.
Actions for Trustees
There is likely to be an increased focus on managing climate risk effectively and ensuring it is on the Scheme's regular agendas for 2021. In particular, this will help Trustees of the larger Schemes to start preparation for the new requirements (which include submitting a TCFD report, publishing reports online, and calculating the Weighted Average Carbon Intensity of their portfolios) and identifying areas where better management of climate risk can be made, as well as remaining nimble to capture climate-related opportunities in portfolios.
Whilst Schemes within the £1bn to £5bn range will have a longer timeframe to prepare for these requirements, we would view 2021 as the year to start getting prepared and ensuring a plan is in place. Other smaller Schemes won’t be specifically caught by this yet.
However, the direction of travel is clear and we see 2021 as the year to start getting ready regardless, as a proportionate approach might be used for those Schemes in future and/or expected by their members.
Long term targets – reviewing the impact from 2020 turbulent markets
2020 has provided us with a lot of market twists and turns. There has no doubt been winners and losers in the wake of the pandemic, the Brexit horizon, and the outcome of the RPI consultation reform. Schemes will undoubtedly look to 2021 to take stock and re-test their long term objectives to review progress against plan. This may give rise to opportunties to reduce risk further in their portfolio, or to capture attractive investment opportunties to add return.
Actions for Trustees
Trustees may have long term objectives in place already, or have looked to set objectives on the back of tPR’s funding code released early in 2020. Given the impact of many aspects over 2020, trustees are likely to have a review of their long term objectives, whether Schemes remain ‘on track’ with progress and the implications for their portfolios as a result.
Focus on a review of equity exposure will be key
With the market volatility experienced during 2020, the impact on a Scheme’s equity portfolios is perhaps where we’ll have seen most deviation in returns relative to the sharp fall and recovery in markets during the year. 2021 will therefore be key in Trustees reviewing their equity exposure by various factors (geography, sector, style tilts etc..) to understand where they have specific concentrations relative to views of the market.
Action for Trustees
Trustees have been spending more time engaging with managers generally in the wake of the pandemic and from an ESG perspective and we expect that to continue in 2021. Trustees should ensure they review and understand their current equity exposures across their mandates to identify themes or any unforeseen concentrations that may have been unplanned. This may lead to a review of Trustees’ equity portfolio strategy and potential re-positioning of the equity portfolio going forward.
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