Strategic overhaul at the People’s Pension: £15bn invested in climate tilted stocks
The People’s Pension, one of the UK’s largest private workplace pension providers has introduced an overhaul of its investment strategy, with more than half of its assets to be invested in climate aware equity strategies
The last few months have been eventful for the People’s Partnership, provider of the master trust the People’s Pension. The fund, which serves 6.5m members across the UK hit £25bn in assets under management at the beginning of this year. Within the next five years, it expects its assets to double to £50bn, making it one of the largest pension funds in the UK.
It also hired a new CIO, Dan Mikulskis, who joined from consultancy firm Lane Clark & Peacock. Earlier, it had appointed Leanne Clements a head of responsible investment, she joined the master trust from Carbon Tracker, where she was head of stewardship.
But when it came to climate strategies, there was catching up to do, as Net Zero Investor reported in January. The fund is the only UK master trust which does not yet have a formal net zero strategy in place, though it pursues a net zero ambition.
The People’s Partnership also scored second lowest in a recent league table of the UK’s workplace pension providers, due to among others the lack of clear interim targets, continued exposure to fossil fuels and deforestation risks.
Catching up
Just weeks after the publication of the league table, the team at the People’s Pension announcement announced a plan that has been months in the making: £15bn of its equity holdings will has been shifted towards a climate aware investment strategy, a move which is has reduced the carbon footprint of the default portfolio by 30%, the fund said.
Dan Mikulskis will speak at Net Zero Investor's Renewable Infrastructure Summit on 12 March at the London Stock Exchange
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The shift towards climate aware equities is initially focused on developed market equities but the fund intends to expand the climate aware focus across other asset classes, Mikulskis told Net Zero Investor. In practice, this means that the fund will now be using the MSCI Climate Change Index rather than a general MSCI index, he explained.
Like most DC default funds, the People’s Pension's default strategies tend to be predominantly invested in developed market stocks which account for between 64% to 100% of all default portfolios in their growth stages.
Mikulskis added that the new investment approach was designed to adjust the level of investment in companies based upon their exposure to climate risks and opportunities, and tracks regional indices, which aim to exceed the minimum standards of the European Union’s Climate Transition Benchmark.
This meant that in addition to the immediate 30% emissions reduction cut, the fund is expected to reduce its emissions by a further 7% each year with the aim of hitting net zero by 2050.
Despite this overhaul, the People’s Pension continues to work with the same fund manager, State Street Global Advisers, it has, however switched towards MSCI’s Climate Change Indices, Mikulskis told Net Zero Investor.
The new strategy meant that members would not only be reassured that their pension fund was working towards the goals of the Paris agreement, but would ultimately also benefit from better investment returns, Mikulskis argued.
“We believe that incorporating ESG factors in our investment decisions has the potential to contribute to risk adjusted returns for our members over the long-term. We consider climate change to be the ESG issue most likely to be material to member outcomes” he emphasised.
Recent academic research backs this argument. While stocks for individual oil and gas firms have risen in recent years, over a ten year time horizon, funds with a lower exposure to the fossil fuel industry have outperformed wider equity indices.
Focus on listed markets
But these ambitions are initially limited to listed markets only, Mikulskis said. Unlike some other master trusts, which have signed the Mansion House Pledge to commit at least 5% of their default portfolios to illiquid assets, the People’s Pension does not currently invest in private markets.
Mikulskis does not rule out that they could form part of the strategy as the fund grows in size, but he believes that several structural issues would need to be addressed first. “The fund industry offerings need to mature, for example through development of an industry funds management organisation as has been done in Australia or structures through third party managers” he told Net Zero Investor.
Mikulskis also called for a step change on fees including the elimination of performance fees and overall lower fixed fees. Finally, he argued that the conversation between government and the investment industry is so far lacking in detail and should be narrowed down to specific asset classes: “private equity, venture capital and infrastructure are all very different” he argued.
While it may still be early days, Mikulskis is confident the new strategy will bolster the master trust’s net zero standing. “We believe the changes we have announced mean that The People’s Pension is now one of the greenest master trusts in the UK, which is great news for our members. Asset owners like us are uniquely positioned to use our size and influence to ensure our members’ savings are allocated and managed responsibly, and that the companies in which we invest are acting in responsible and sustainable ways.”
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