Merseyside to shift
to alternatives in
further climate push

The Merseyside Pension Fund is overhauling its investment strategy to further embed climate-aware and environmental, social and governance investing into its processes.

The £8.6bn Local Government Pension Scheme fund began the review last year following a significant improvement in its funding level.

The scheme plans to reduce its equity and gilts exposures in favour of a range of alternative asset classes, including infrastructure, private credit, high-yield bonds and emerging market debt.

A spokesperson for Merseyside Pension Fund told Pensions Expert the asset allocation review would also consider asset-backed securities, bank loans and supply chain finance.

The Merseyside Pension Fund’s funding level has improved significantly over the past few years, reaching 101 per cent as of March 31 2019. An equity protection strategy implemented in April 2019 helped protect the scheme from the worst of the pandemic-induced market falls, according to the scheme’s 2019-20 annual report.

Yesterday (January 20), Natixis Investment Managers affiliate Mirova announced that Merseyside was among an international group of investors backing its latest energy transition fund. The Mirova Eurofideme 4 fund was created specifically to acquire a €2.2bn (£2bn) portfolio of Portuguese hydroelectric assets, according to a press release issued by Mirova.

At a management committee meeting in November, the scheme’s director of pensions Peter Wallach said this had created an opportunity to review Merseyside Pension Fund’s asset allocation and investment strategy to protect its funding position.

An ESG leader

Wirral Council, the administering authority for the Merseyside fund, declared a climate emergency in July 2019, but the scheme has been a leader in ESG and climate-aware investing for much longer.

In 2016, the fund aligned its investment strategy with the goals of the Paris Climate Agreement – namely to keep the global temperature rise to a maximum of 1.5°C above pre-industrial levels – and followed this with a strengthened responsible investment policy in 2018.

According to council documents, the scheme’s latest triennial valuation, using data as of March 31 2019, “for the first time incorporated the consideration of climate risk through climate scenario modelling”.

Aon, Merseyside’s investment consultant, put forward proposals to simplify governance and enhance returns “without a commensurate increase in risk”. It “recommended consideration of additional assets and investment products that deliver these objectives with an emphasis on sustainability”, a summary report from the November council meeting stated.

Winds of (climate) change

The new strategy will build upon Merseyside’s previous actions, including moves it took in 2018 and 2019 to decarbonise its investment portfolio with allocations to low-carbon equity indices. It has also been building up its allocation to renewable energy assets in its infrastructure portfolio.

Yesterday (January 20), Natixis Investment Managers affiliate Mirova announced that Merseyside was among an international group of investors backing its latest energy transition fund. The Mirova Eurofideme 4 fund was created specifically to acquire a €2.2bn (£2bn) portfolio of Portuguese hydroelectric assets, according to a press release issued by Mirova.

“With changes proposed to assets and benchmarks as a consequence of evolving best practice, factor analysis and the changing market environment, there is the opportunity for investment strategy and the underlying mandates to be redesigned at the same time to build in climate risk and ESG considerations in a consistent and structured way,” the November report said.

This could affect equity portfolios more than fixed income, the report suggested, as the fund sought to bring mandates in line with its responsible investment policy. The Merseyside spokesperson said: “At this stage, the only decisions that have been taken are around the strategic asset allocation changes. Further work is to be undertaken by the fund to determine what implementation will entail. External mandates will need to evolve to accommodate the fund’s revised requirements, but we are not able to be any more specific at the moment.”

The November report also cited the Department for Work and Pensions’ plans to impose climate risk reporting requirements on private sector schemes as a reason for reviewing and enhancing Merseyside’s climate risk strategy.

A boost to internal teams?

Addressing the scheme’s management committee in November, Mr Wallach indicated that Merseyside was considering “additional staffing resources required to support the development and implementation of the strategy proposals”.

He suggested that the scheme could add to its internal investment, responsible investment, finance and compliance teams in line with its long-term objective to “deliver cost savings by developing the internal team”.

The spokesperson said these requirements were still being assessed and no decisions had been made.

The Merseyside Pension Fund intends to use a climate-aware investment template developed by the Institutional Investors Group on Climate Change, an international group of asset owners and managers that have taken on a leading global role in the fight against a warming climate.

Adam Gillett, head of sustainable investment at Willis Towers Watson, said: “The IIGCC has done a lot of work around the pathway to net zero and the guidance they have provided is very useful as a tool for schemes to consider. It’s something we’ve actively contributed to, support, and encourage our clients to really engage with and apply to their own scheme contexts.”

The IIGCC template has also had input from LGPS funds and pools including the Brunel Pension Partnership, the Environment Agency Pension Fund, LGPS Central and the Local Pensions Partnership.

However, the Merseyside spokesperson emphasised that it would not be the only tool used to develop the new asset allocation.

Mr Gillett said: “There are a number of metrics for assessing climate-related progress such carbon emissions, carbon intensity and allocations to climate solutions, but having the strategic framework of a carbon journey plan gives coherence and structure. It helps schemes understand what is feasible, what levers to pull and when, and importantly how this enhances the ultimate scheme objectives and funding journey plan.”

Mr Wallach indicated that the strategy review and asset allocation changes would be implemented over the next three to four years.