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Merseyside scheme using Aon Hewitt climate scenario analysis in strategic review

Findings will feed into triennial actuarial review by Mercer

The Merseyside Pension Fund in northwest England will use climate scenario analysis based on models developed by its investment consultant Aon Hewitt as part of its strategic review linked to an actuarial valuation being undertaken by rival Mercer.

The £9bn (€10bn) fund – which earlier this year saw a Green Party councillor elected as its chair and which has put a large slug of its equities portfolio into a low carbon index strategy – says its view is that “climate change is a systemic risk and thus, a material long term financial risk for any investor that must meet long term obligations”.

The fund administers the Local Government Pension Scheme for over 137,000 members on Merseyside, the metropolitan county centred on Liverpool.

The fund said in its new annual report and accounts that the strategic review process, which is linked to the triennial actuarial valuation of its liabilities, has been initiated and will conclude in the third quarter of this year.

It said: “This will utilise climate scenario analysis (working with climate models developed by Aon Hewitt, the fund’s investment strategy adviser) to test the resilience of proposed asset allocation models in four climate change scenarios versus a base case scenario (which will assume that asset returns will move in line with what currently appears to be priced into the market).”

The scheme’s consulting actuary is Mercer, whose investment consulting arm has helped inform institutional investors’ thinking on climate change with a series of reports dating back to its ‘Climate Change Scenarios: Implications for Strategic Asset Allocation’ in 2011. It’s not unusual for funds to use different consultants for investment advice and actuarial work.

The Merseyside report says the triennial valuation commenced on March 31 and that, while calculations of the fund’s liabilities are still being finalised, “initial indications are that the funding level has improved significantly from the March 2016 level of 84.8%”.Scenario analysis is a key element of the Mark Carney-inspired Task Force on Climate-related Financial Disclosures (TCFD) and the report includes a TCFD statement. It comes amid what analysts at Bank of America Merrill Lynch, in a primer on the TCFD, have this week dubbed “Climate-geddon in reporting”.

“Test the resilience of proposed asset allocation models in four climate change scenarios versus a base case scenario”

As previously reported, the Green Party’s Pat Cleary was elected Chair of the Merseyside Pensions Committee, replacing Paul Doughty. Cleary, the first Green party councillor to hold this position, has pledged to reduce the fund’s exposure to carbon and increase investments in the local green economy.

The scheme has one-third of the passive equities portfolio (£428m or approximately 10% of total equities) now invested in a low carbon index strategy from FTSE Russell that tilts away from stocks with higher CO2 emissions intensity or significant fossil fuel reserves, but also introduces a tilt in favour of stocks with ‘green revenues’.

Separately, the Merseyside scheme’s near neighbour, the University of Liverpool, has agreed to divest from all fossil fuels following pressure from the Liverpool Guild of Students’ Fossil Free campaign team.

Campaigners said the University’s Investment Sub-Committee endorsed the campaign’s demands and the decision to divest was approved by University Council last month. The University has committed to sell its remaining £2.8m holdings in fossil fuel companies by July 2022, they said.