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Russia’s invasion of Ukraine has caused U.S. pension plan sponsors to focus on the long-term sustainability of their plan’s investments.
U.S. sanctions imposed on Russia have caused U.S.-based pension funds to divest from or suspend allocations to the emerging market’s assets. But this will have narrow impacts to defined benefit plans’ risk and return outlooks, according to pension investment experts.
“For most of our clients, their exposure to Russian securities is very small,” says David Eisenberg, outsourced chief investment officer leader at Buck. Many pension plans for which Buck advises and consults are globally diversified and relatively mature, and therefore “lean toward fixed income,” allocations he explains.
Global Markets’ allocations to Russian equities were “about one and a half percent of the MSCI Emerging Markets Index, and Russian debt was a little over 2%,” Eisenberg says. Therefore, for a client that had 10% exposure to emerging markets, that plan’s Russia-specific exposure “at the index level is probably less than 20 basis points,” he adds.
Al Pierce, managing director for the SEI Institutional Group, agrees that pension allocations to Russia are so small as not to dent the plans. However, U.S. pensions are reacting to President Joe Biden imposing sanctions on Russia by concentrating a greater focus on the long-term overall sustainability of investments, he explains.
“What the Ukraine war brought to light is giving our plan sponsors more insight into the underlying criteria that we use around sustainability,” he says. “To take a step back and say, ‘What have pension plan sponsors done differently today [compared to] what they were doing before the war in Ukraine?’ They’ve taken a broader look at sustainability as it relates to their investments.”
A couple of plan sponsors have acted to implement sustainability factors into the pension plans to gain greater insight into the plans’ sustainability and environmental, social and governance profile, Pierce adds.
“Typically, you’ll see it more with foundations, endowments, health care organizations, but we’ve seen some pension plan sponsors actually take a look at doing that as well,” he says. “Pension plan sponsors tend to be [within] manufacturing, chemical companies or companies that are being asked about sustainability and ESG, and to the extent that we can help them provide information on how their investments are considering and taking a look at sustainability factors, it helps in their process of making sure that they are doing what they can to put forth the best profile.”
Pierce promoted SEI’s proprietary process as providing pension plan sponsors with a sustainability score—strong, moderate, or weak—for greater insight into the long-term sustainability of the pension’s investments.
Pierce adds that while some pension plan clients working with SEI are dedicated to ESG and “having certain exclusionary practices within their investments, in the wake of Russia’s invasion, plan sponsors have given greater thought to the sustainability profile of allocations and investments for the long term.
“Even though they’re not necessarily being managed within a particular ESG, or sustainability, focus or screen, we do look at that as part of our manager research process, because what we found is managers and products that have higher [sustainability] scores tend to have better processes and better outcomes,” Pierce says.
Robert Projansky, partner with international law firm Proskauer Rose, says that U.S. pensions have split into two “principal categories” in reacting to sanctions. “First, pension plans with dedicated Russian or emerging market portfolios have been reaching out to their managers to confirm their compliance with sanctions, particularly where the managers could not immediately divest of holdings due to the suspension of trading in the Russian markets,” he says.
U.S. pension plans are also concerned by Russian investment risk, spiking global market volatility, and “potential illiquidity associated with Russian investments,” Projansky adds. “Some may view this as potentially a shorter-term issue, leading them to use terms like ‘suspension,’ however, others are looking at these events as having opened their eyes to the risks associated with Russian investment going forward for the longer term,” he says.
According to Eisenberg, Buck’s research from March found that pensions have been careful to say “suspend,” not “divest,” when it comes to Russian investments.
Information released last month by CoreData Research shows that 50% of global institutional investors will act to change their ESG strategy to exclude Russian investments. The research also found that 17% of global investors say they will alter their ESG strategy to permit investments in defense-related companies, and 50% are undecided.
Pensions are also having to grapple with determining the best approach for the long-term health and viability of the DB plan. Developing, implementing, and revisiting the pension’s long-term strategy is table stakes, says Eisenberg. He advises that pensions revisit their long-term strategy “often enough to be satisfied as a plan sponsor that [the] long-term approach is truly aligned with the needs and purposes of the fund—in the case of defined benefit plans—that’s alignment with the liabilities of the fund.”
Projansky adds that “the first step for plan fiduciaries is to reach out to the plan’s investment managers, as part of the fiduciary’s monitoring role, to confirm that they have taken the necessary steps to comply with sanctions. The second step is to consider a dialogue with the plan’s investment advisers regarding whether the risks associated with investments in Russia that have been uncovered by recent events outweigh any likely benefit, or whether the same benefits can be replicated elsewhere in emerging—or other—markets without having to expose the plan to that risk.”
Eisenberg also cautions that it would be very challenging for pensions to make large changes “in the midst of a crisis.”
“You have to anticipate these things and have those reflected in the investment program,” he says.