Pensions

6.4 Pensions

Guernsey has through 40 years’ experience proven itself as a centre of excellence for International Retirement Plans, offering a whole suite of services and products to suit the unique requirements and objectives of the scheme sponsors and members. In 2001 Guernsey became one of the first jurisdictions in the world to regulate pensions provision, followed in 2017 by pension scheme rules to provide further protection for its members.

What role can it play?

There are varying forms of pension schemes that Guernsey offers which can play a key role as asset owners, directing capital towards sustainability and just transition objectives on behalf of their clients, whilst protecting the longer term value of their assets.

Specialist structures: such as occupational pensions/international pension plans (IPP): international and savings plans (ISPs): can provide short or long-term savings vehicles with the objective of offering an efficient savings facility, rather than a retirement facility; Guernsey is considered as a centre of excellence in Qualifying Non-UK Pension Scheme (QNUPS); these can be leveraged to support sustainable savings and retirement solutions, through integration of ESG factors into the design of the plans

Sustainable Trustees: Pension scheme trustees can discharge of their fiduciary duty to manage and protect the long-term value of the fund by integrating environmental, social and governance risks and impacts into the scheme’s investment mandates, and how they evaluate the performance of the pensions assets and external fund managers. This is critical to protecting the long-term value of their investments and mitigating longevity risk.

What has been done to date?

Education and awareness raising: around sustainability themes, via Guernsey Green Finance and associated initiatives, such as Sustainable Finance Week

Guernsey Green Forum: provides advice and guidance for local businesses around integration of environmental, social and governance themes into pension scheme structures66

What are the key levers the sector has to pull?

Much like the insurance and trust & company sectors, pension funds can drive sustainability and just transition objectives through their own operations and through their role and influence as asset owners:

Sustainable Operations: Developing a clear strategy and timeline to reduce emissions across your operating model, for example, through renewable energy contracts, electric vehicles for employees, and improved waste and recycling processes

Sustainable Investment Portfolio: using your role and influence as an Asset Owner to drive a holistic set of E, S and G objectives into your investment mandates, including the objective to transition invested portfolios in line with the net zero goal for managed funds

Creating returns for the longer term: Balancing and matching investment returns with funds’ liabilities via investment strategies that counter short term pay outs to members with long term sustainability objectives

Sustainable Operations:

Reduce operational Scope 1, 2 and 3

Emissions associated with your firm’s offices, branches, company-owned vehicles, business travel and understand the emissions associated with your supply chain, as well as any wider ESG risks with key suppliers. Consider key tools e.g. ECO Vadis to monitor this.

Develop a clear plan with near term milestones for how you will reduce emissions Sustainable Investment Portfolio:

Require asset managers to measure and disclose portfolio emissions in line with industry standards (PCAF etc)

Align to frameworks such as the NZAOA to support you in developing strategies to reduce ‘financed emissions’ across your investment portfolio through engagement, influence and incentives to drive emissions reductions in the wider economy

Balance short term pay outs while considering new asset classes which provide a holistic range of green and sustainable offerings to propel just transition objectives

What are the key challenges and risks?

There are some key challenges and risks which are unique to this sector:

Theme

Education and awareness

Lack of demand

Quality of Climate and ESG data and scenario modelling Risk

Variable level of expertise and awareness around ESG risks and opportunities across the island

Lack of demand for sustainability investing

Investment modelling is heavily dependent on the core data sets being used and the ability for the pension organisation to understand the outputs of the modelling Provide further education on various topics to level the playing field; promote new courses e.g. CFA certificate in Climate Investing; continue to facilitate regular dialogues to promote knowledge-sharing across the wider sector

Preferential funding for sustainable companies and other sustainable products such as SLL’s and Sustainability Trade finance

Assess the appetite to complete climate and net zero modelling in house. Where investment mandates are used, use the investment manager for related climate data and insights on your portfolios

Mitigation

Case Study: Employer provides sustainable pension solutions67

Background: An employer with 100 employees did not provide an ESG or “Green” pension option through its Defined Contribution scheme. The company was made aware of the opportunities and risks these ESG issues posed to its members as well as to its own business. They realised that ignoring ESG issues could compromise investment performance and create financial risk.

Specialist Advisors: The employer referred this issue to the Trustees and asked them to provide proposals to address this issue. Given the complexity of the issues, specialist advisors were enlisted to provide professional advice which highlighted that climate change was a considerable risk to the value of the pension fund’s assets. As the scheme was not large enough to create its own pooled fund, they provided a comprehensive review of available options in the market.

Market Review: The Trustees commissioned a review, which included the assessment of the risk and return of the investment as well as compliance with a climate change mandate. There were three funds that were chosen by the specialist advisors which met the risk/return profile along with the climate change mandate plus one fund that would be integrated into the company’s default strategy.

Next Steps: Once the company agreed to the proposal of funds, they carried out member briefings which generated a very positive response. The Trustees made all three funds available under the self-select option and agreed with the employer to keep the options under review.