De-risking report 2025
Over the last five or so years environmental, social and governance (ESG) credentials have been a factor of increasing importance when selecting an insurer for buy-in/buyout transactions, albeit perhaps not as important as price. This focus aligned with trustees’ fiduciary duties to prioritise affordability and security for members. However, 2024 may be looked back on as the year this dynamic shifted. A growing emphasis on sustainability is prompting trustees to ask more questions about insurers' ESG credentials and, in some cases, to make these factors a bigger part of their decision-making process.
Educational initiatives have been crucial in this transition, providing trustees with insights into climate-related risks and sustainable investment opportunities. Workshops and training sessions run by WTW’s specialist Climate team, along with regulatory guidance, have clarified ESG concepts, aiding trustees in integrating them into their investment strategies. Over 60% of participants in WTW’s 2023 Emerging Trends in DB (defined benefit) Pensions Survey reported receiving climate change training, with a growing emphasis on preparing action plans to address climate change, including active investment or divestment based on climate considerations. This has led to greater scrutiny of insurers’ ESG credentials by trustees who are well-versed in climate risk.
Improved scheme funding levels and potential surplus assets are shifting focus towards non-price factors. According to WTW’s 2023 Emerging Trends in DB Pensions Survey, over half of respondents believe that environmentally supportive investments yield better long-term performance, and one in three think such investments are worthwhile even if they result in moderately lower risk-adjusted returns. Trustees willing to accept lower risk-adjusted returns are likely to consider paying a higher premium to transact with insurers who have strong ESG credentials.
54% Believe that investments supporting the environment deliver better long-term performance
36% Believe that investment should support the environment (even if risk adjusted returns are moderately worse)
On 30 July 2024, TPR released its findings from its regulatory initiative, examining trustees’ statements of investment principles (SIPs) and implementation statements (ISs). The review covered 3,500 scheme returns and included an in-depth analysis of ESG and climate-related information from around 50 pension schemes.
It concluded that trustees often failed to take ownership of their ESG policies and activities. TPR recommended that trustees allocate sufficient time and resources to preparing their SIPs and ISs and enhance transparency of their ESG policies to show consideration of ESG-related risks to their scheme.
With TPR also reviewing schemes’ climate-related disclosures, and the release of the General Code of Practice setting clear expectations around climate risk, including that trustees should ensure consideration of environmental factors is part of their investment decision making process, it is clear that this in an increasing area of focus for the Regulator. This will likely increase the consideration trustees pay to insurers’ ESG credentials when considering buy-ins.
January 2024 saw the launch of the Charter, an initiative by Accounting for Sustainability (‘A4S’), developed in collaboration with the Church of England Pensions Board, Railpen, insurers, advisers, and trustees. The Charter promotes the principles of transparency, sustainable decision-making, reporting and collaboration, aligning stakeholder expectations and seek to promotes responsible investment practices.
WTW is a signatory to this Charter, reflecting our commitment to improving sustainability standards and reporting, consistent with our approach to ESG research of bulk annuity insurers over the years.
This industry-wide initiative demonstrates the importance of sustainability within the bulk annuity process and further enhances scrutiny of the insurers’ sustainability credentials.
Whilst climate change risks will remain important, it is becoming increasingly clear that the risks related to nature and biodiversity loss will require similar detailed attention and reporting. This can be seen through the emergence of the Taskforce on Nature-related Financial Disclosures, alongside recently published PLSA Guidance on the matter. It also indicates that attention to insurers’ sustainability related credentials isn’t going anywhere anytime soon.
We recently released the results of our fifth annual research report of insurers’ ESG credentials, which we use with clients as part of their insurer selection processes. The conversations around this research also allow us to challenge insurers to improve their approach – and each year we refine the criteria, and raise our expectations where required, as we look to drive year-on-year improvements.