Pension schemes fail on climate action

Trustees prioritize short-term security over long-term impact

Closed defined benefit (DB) pension schemes manage over £1 trillion in assets. As they wind down, investments shift toward low-risk holdings to ensure member payouts before transferring liabilities to insurers. Trustees claim their limited time horizon and minimal exposure to growth assets leave little ability to affect climate outcomes.

Rules require them to evaluate climate risks to their portfolios, not the broader environmental effects of their investments. This distinction matters—one safeguards returns, while the other could transform the economy. Punwani argues this narrow view allows trustees to avoid deeper responsibility.

Mandatory climate disclosures have overwhelmed discussions. Rather than spurring action, the paperwork has led some trustees to disengage entirely.

Redefining fiduciary duty

Punwani proposes expanding trustees’ legal obligations beyond immediate financial security. He suggests two key changes:

• Time horizon: Trustees should consider members’ financial interests over their lifetimes, not just until buyout.
• Scope: They should assess the real-world impact of investments, not just climate risks to their portfolios.

This adjustment wouldn’t force trustees to choose climate over returns. Instead, it would allow them to justify steps benefiting both, such as pushing companies to reduce emissions or tying government bond purchases to green policies.

LCP already guides clients on aligning capital with the energy transition. Punwani acknowledges closed DB schemes contribute minimally to the massive redeployment of capital required. The issue isn’t a lack of tools, he says, but a lack of clear permission.

Turning theory into action

Punwani details how trustees could operate under revised duties.

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First, they would move beyond reporting to focus on tangible outcomes. Even if trustees don’t prioritize climate, they can’t ignore how the energy transition will reshape markets.

Second, they would leverage collective influence. Trustees could work with other investors to pressure companies and regulators toward sustainable practices. No single scheme drives change alone, but coordinated efforts can.

Third, they would reconsider safe assets. UK pension funds hold significant government bonds. What if they demanded those funds support green policies? If governments resist, trustees might explore lending to more aligned nations, hedging currency risks.

Fourth, they would favor insurers committed to sustainable investing at buyout. This extends their influence beyond the scheme’s lifespan.

Finally, Punwani presents the choice as one of interpretation. Two identical schemes reach buyout—one quickly, the other after years of engagement. Under his proposed standard, the latter would be viewed more favorably. The current system rewards speed over impact.

He avoids prescribing specific investments but emphasizes compliance alone won’t solve the problem. Without a legal framework enabling action, the £1 trillion in closed DB assets will remain inactive.