In its response to the Department for Work and Pensions’ (DWP) consultation on the consideration of social risk and opportunities by occupational pension schemes, Lincoln has noted that there is no mention of the need for trustees of DB pension schemes to also understand the potential impact of social risks on the employer covenant provided by the sponsoring company.
The significant reliance of DB pension schemes on their employer covenant is matched by the exposure of those employers’ financial performance to social change and risks; issues ranging from labour-force relations and consumer sentiment for an employer’s products to diversity of management and the nature of an employers’ clients might all impact both financial performance, company investability and therefore pension scheme security.
As examples of the risks, Lincoln highlighted how long-term social changes can increase a scheme’s funding liabilities at the same time as reducing demand for an employer’s products (e.g. if an aging population reduces demand for children’s toys); or, social risks can crystallise at speed, sharply reducing demand for an employers’ products at the same time as undermining a scheme’s investments (for example, if an employer’s products are subject to a consumer boycott that also affects an industry or geography more broadly).
Michael Bushnell, Managing Director of Lincoln Pensions, said: “Given the materiality of DB pension schemes’ continuing reliance on their sponsors, we believe it is essential that trustees act to understand the possible impact of social risks and opportunities on their employer covenant, and to consider how this influences their investment and funding choices. Understanding the impact on invested assets alone will ignore a material risk for DB scheme members.
“We would strongly recommend that an approach to assessing social risks and opportunities facing employer covenant is adopted. The assessment of these risks can be undertaken with public information, the knowledge of trustees and management, and professional advice (where relevant and necessary). Social risks cannot be considered the ‘poor cousin’ of ESG and Trustees should feel enfranchised to request necessary information as they would for a standard assessment of their employer covenant – or for assessing the impact of climate change risk.”
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