Sustainability blind spot?


For something that’s not well known outside the world of pensions, bulk annuities are surprisingly big business.

Around £50 billion was transferred from pension funds to insurers in 2023 as trustees with well-funded pension schemes transfer assets and risk to insurers, de-risk their own balance sheets, and look to lock in benefits for their members.

Of course, pension funds take great care to select the best available insurer. But the nature of these transactions – which involve at their core a transfer of money and responsibility – means there’s a disconnect between the sustainability approach that pension funds take, and the one insurers take when they invest what were previously pension assets.

Simply put, once pension funds pass over the assets, they have no say in or responsibility for how they’re invested, even though those are the assets that ultimately pay members benefits.

For a fund like the Church of England Pensions Board, with robust Net Zero commitments, stewardship commitments, a strong ethical investment focus, and a concern for the world that our members will retire into, that’s far from ideal. So what can we do?

To date, the standard approach has been to assess ESG credentials as part of a bulk annuity transaction and for trustees to take account of this in the final decision. For some pension funds this will have more of a bearing on the decision than others, and in all cases it could be a tie-breaker in a competitive process.

Though making a decision to transact is an important point of leverage, is it enough if we care about the world our members will retire into, and are aiming to improve the sustainability and resilience of the financial system? (see e.g. Principle 4 of the UK Stewardship Code 2020)

Over the last year a number of pension schemes have been working with insurers to go beyond this transactional approach to sustainability.

Together with our partners at Railpen and A4S, and a strong group of 20 founding signatories representing all sides of the bulk annuity market, the Bulk Annuity Sustainability Charter represents progress, a positive step in engagement between pension funds, insurers, and advisors. We have aligned behind principles that frame best practice, will improve transparency, and that provide a focal point for ongoing conversations around narrowing the gap between the commitments trustees make about assets in their care (e.g. Net Zero, biodiversity, or human rights commitments), and assets that end up being managed by others in order to pay our members’ pensions.

The Charter is now live, and pension schemes, insurers and advisors that would like to participate in the future of this initiative should get in touch.