In Part 1 of this blog, I explained why pension scheme trustees should consider the Responsible Investment (RI) practices of the insurers who provide bulk annuity policies, both before and after entering into such a policy.

To help our clients with this task, we conducted our first formal RI survey of buy-in providers in late 2019. Seven insurers answered a series of questions about their approach to environmental, social and governance (ESG) factors and their engagement activities. The eighth insurer declined to respond since it was partway through updating its RI approach. We analysed the seven responses and assigned each insurer an overall score on a 1-4 scale where 1 is weak and 4 is strong.

Overall results of our survey

All seven insurers who responded are considering ESG factors and engagement to some extent and many of them are actively enhancing their approach. We concluded that all of them are doing enough to score at least a 2. However, all still have room for improvement and so we didn’t feel that any of them yet warranted the top score of 4.

Public commitments to responsible investment

We asked the insurers whether they have signed up to the three initiatives we consider to be most relevant to RI: the UN-backed Principles for Sustainable Insurance (PSI), the UN-backed Principles for Responsible Investment (PRI) and the UK Stewardship Code. The answers were disappointing. Only one is a signatory to all three; one is a signatory to two initiatives; three have signed up to one of them; while two haven’t signed up to any. Moreover, in several cases, the entity making the commitment is not the one writing the annuity policies. For example, for two insurers, the firm’s investment management arm is an asset manager signatory of the PRI, but the life insurance company is not an asset owner signatory of the PRI, despite being amongst the largest UK institutional investors. However, several are actively considered signing up to additional RI initiatives.

Insurers with asset management arms

Perhaps predictably, the larger insurers with investment management arms – such as Aviva and Legal & General – relied heavily on the RI expertise and resources of those subsidiaries. These insurers tended to have the most well-developed processes for considering ESG factors in the day-to-day management of the underlying assets as well as the most well-developed engagement practices. The downside though was that they typically seemed over-reliant on their investment management arms. In the same way that pension trustees make strategic RI decisions and oversee RI implementation, we would expect the insurers’ life insurance boards to provide strategic oversight of RI for the bulk annuity assets – for example, considering the implications of ESG for long-term asset allocation and setting RI expectations for their in-house asset managers. After all, these are sizeable investment portfolios varying from approximately £10bn to £75bn and growing rapidly.

Specialist insurers

Encouragingly, some of the specialist buy-in providers also had good RI practices. They manage some of their assets internally and outsource the management of their other assets to external asset managers. ESG was usually an integral part of external manager selection and monitoring. The specialist insurers tended to be weaker at engagement and, in some cases, did not seem to recognise that it can even be undertaken for fixed income assets (which comprise most of the assets underlying buy-in policies). Given that the UK Stewardship Code has recently extended oversight beyond equities, we hope they will place greater emphasis on this area in future.

Missing the big picture

The area where insurers’ answers were weakest was holistic consideration of ESG risks, including climate change. All consider, to some extent, ESG factors at the individual investment level, but few appear to be thinking about the bigger picture. For example, how ESG factors might affect the liabilities and the extent of the mismatch between asset and liability cashflows. As RI approaches become more sophisticated, we expect this will improve. Indeed, the Bank of England recently consulted on conducting climate stress tests in 2021, creating a potential catalyst for change.

What next?

If you are selecting an insurer for a buy-in policy, then do consider including Responsible Investment in your selection criteria. Ask the insurers some probing questions, including how they are managing potential systemic exposures in their annuity books, such as climate-related risks. If you already have a buy-in policy, then consider including the provider in your RI monitoring programme, alongside the other parties who manage assets on your behalf.

To find out more about our survey, including our assessments of individual providers, please speak to your usual LCP adviser.