Concerns raised over DB trustees' 'surprisingly sanguine' approach to ESG

Almost a third (31 per cent) of 'major' UK defined benefit (DB) pension scheme trustees either do not know or do not understand their sponsor's views on climate change or its environmental, social and governance (ESG) strategy, according to a survey by RSM.

The poll also found that over two-thirds (69 per cent) of trustees did not foresee any potential impact on covenant strength supporting their scheme as a result of the sponsor’s ESG strategy or lack of strategy.

A further 22 per cent of trustees stated that they were unsure of the impact, whilst only 9 per cent predicted any possible impact.

RSM covenant assessment partner, Donald Fleming, highlighted the findings as evidence of a “surprisingly sanguine approach” to the implications for sponsor covenants for DB schemes, "at a time when pension trustees need to be aware of the nuances of how they might be impacted".

He continued: “The ESG agenda has moved the goalposts and created a ticking time bomb for some DB pension schemes in the future.

“Where most of the focus has been on carbon neutral and ethical investments; the need to consider the longer-term viability of a sponsor through an ESG lens is becoming more crucial in understanding the strength of the sponsor covenant and affordability of deficit recovery contributions.

“If a business doesn’t transition well to a net carbon zero business model then future legislation and reputational issues could impact profitability, cash flow and in turn, the value in the pension scheme."

Fleming argued that whilst this might be deemed an "uncontrollable risk" for trustees, how an organisation pivots to ensure key ESG policies could impact the future viability of the DB pension scheme and the security of member benefits.

Considering this, he emphasised that trustees need to evaluate their sponsor’s overall ESG strategy to protect members effectively and mitigate any future risk.

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