Transparency data

Homes and Communities Agency Pension Scheme — Annual Engagement Policy Implementation Statement, accessible version

Updated 27 September 2024

Introduction

This statement sets out how, and the extent to which, the Engagement Policy in the Statement of Investment Principles (‘SIP’) produced by the Trustees has been followed during the year to 31 March 2024.  

This statement has been produced in accordance with The Pension Protection Fund (Pensionable Service) and Occupational Pension Schemes (Investment and Disclosure) (Amendment and Modification) Regulations 2019 and the Statutory and Non-Statutory Guidance published by the Department for Work and Pensions (DWP).

Investment objectives of the Scheme

The Trustees believe it is important to consider the policies in place in the context of the investment objectives they have set.  The objectives of the Scheme included in the SIP are as follows:

The main objective of the Trustees is to maintain sufficient future security within the Scheme to ensure the assets cover the defined benefits. Within the context of this objective, the Sponsoring Employer (Sponsor) wishes to minimise cash-flow variation between financial years as far as possible to within an acceptable range, and the Trustees wish to protect members’ benefits. The investment policy therefore reflects a balance between the following:

• a requirement to maintain a reasonable level of investment risk to keep the cost of the benefit accrual at an acceptable level
• a requirement by the Sponsor to be willing to make contributions to assist in the recovery of the funding level as required
• an acceptance by the Trustees that without a Government guarantee to fund the Scheme, a continued exposure to equity markets implies members bear a significant part of any risk. However, as part of the 2020 actuarial valuation the Trustees have obtained an updated “letter of comfort” from the Department for Levelling Up, Housing and Communities (DLUHC) (formerly known as the Ministry of Housing, Communities and Local Government (MHCLG)), which has confirmed that it will make sufficient resources available to the Sponsoring Employer to meet its pension liabilities as they fall due (including payments under the current and future Schedule of Contributions and to satisfy Section 75 debt requirements).

Review of the SIP

During the year to 31 March 2024, the Trustees reviewed and updated the Scheme’s SIP in December 2023 to detail the change in the provision of the Additional Voluntary Contributions (‘AVCs’) option for members. Namely, the Scheme offered Final Salary tier active members the ability to accrue additional years of service in exchange for Additional Voluntary Contributions. This facility is being withdrawn from April 2024. From 1 December 2023, all active members can contribute to a DC AVC facility.

The latest SIP can be found online at www.gov.uk/government/publications/homes-communities-agency-pension-scheme-statement-of-investment-principles

Post year-end the SIP was also updated to reflect the revised governance arrangements for the Liability Driven Investment (LDI) portfolio.

Policy on environmental social governance (ESG), stewardship and climate change

The Scheme’s SIP includes the Trustees’ policy on ESG factors, stewardship and climate change. This policy sets out the Trustees’ beliefs on ESG and climate change and the processes followed by the Trustees in relation to voting rights and stewardship.

In summary, the Trustees believe that good stewardship, environmental, social and corporate governance (ESG) issues may have an impact on investment risk and return outcomes, and that good stewardship can create and preserve value for companies and markets as a whole. The Trustees also recognise that long-term sustainability issues, including climate change, present risks and opportunities that increasingly may require explicit consideration. The Trustees have taken into account the expected time horizon of the Scheme when considering how to integrate these issues into the investment decision-making process.

In order to establish their beliefs, the Trustees undertook a review of their ESG ratings and beliefs facilitated by their investment consultant. The session facilitated a discussion of the Scheme’s investment beliefs with respect to ESG and provided further training on climate related risk metrics. This training was first provided in August 2021.

Following this, the Trustees undertook an additional review of their broader investment beliefs, including their ESG beliefs during 2022. As part of this review, the Trustees updated some of their ESG beliefs to reflect updated views and the policies currently in place.

The Trustees agree to take a proactive approach to understanding and managing the ESG risks within the Scheme’s portfolio.

The following work was undertaken during the year relating to the Trustees’ policy on ESG factors, stewardship and climate change, and sets out how the Trustees’ engagement and voting policies were followed and implemented during the year.

Engagement

The Trustees recognise that by investing in pooled funds, their investment managers have full discretion when evaluating ESG factors, including climate change considerations, and exercising voting rights and stewardship obligations attached to the Scheme’s investments. This includes undertaking engagement activities, in accordance with their own corporate governance policies and current best practice, including the UK Corporate Governance Code and UK Stewardship Code.

• Following the Trustees decision to carry out more detailed carbon footprint modelling outlined in last years’ Statement, in May 2023, the trustees conducted a carbon metric analysis on the Scheme’s investments. Specifically, the report focused on Carbon Footprint, WACI, and Absolute Emissions of each mandate compared to the benchmark, as well as the quality of data reported. The report also covered key trends in terms of managers and mandates that were most carbon intensive, as well as specific stocks that were adding to the overall carbon intensity. This provided with Trustees with information to engage with the investment managers at review meetings. The Trustees completed a similar report to post year-end and this will be reported on within next years’ statement.

• In May 2023, the Trustees conducted an annual ESG review of the Scheme’s investment managers, in which they assessed the managers against their respective investment universe.

• In November 2023, the Trustees also reassessed how well the Scheme is currently integrating ESG considerations through the investment consultant’s Responsible Investment Total Evaluation (RITE) review. This considered the Trustees’ responsible investment beliefs, policy, process and portfolio against best practice and considered potential interventions to improve responsible investment integration. For example, undertaking Carbon Footprint Analysis and other climate-related metrics and reviewing and considering implementing allocations to strategies that have a greater focus on ESG and Responsible Investing. The output from this evaluation was also compared with the previous years’ results to assess how actions taken over the year have impacted the final score for the Scheme.

• Following the RITE review, the Trustees discussed the improvements made in the past year and the actions which could be a focus in 2024, including the expansion of the Trustees ESG beliefs and continual review of carbon footprint analysis, amongst other things.

• The Trustees have previously agreed that, where possible, for any new mandates implemented in the future, the manager’s approach to ESG considerations would be considered as a factor in the decision-making process. The Trustees also agreed that, where incumbent managers of the Scheme launch similar strategies, with a greater ESG integration focus, to the main strategy that the Scheme already invests in, the Trustees will assess the ‘ESG tilted’ strategy, including on risk, return and cost grounds, and decide whether to move to the alternative strategy. A review like this was carried out during the year, following which the Trustees agreed to retain their existing strategy due to the impact on return expectations from the ESG tilted strategy.

• The Trustees have reviewed their investment managers’ compliance with the principles of the UK Stewardship Code as part of this statement and will continue to do so annually. All the Scheme’s investment managers confirmed that they are signatories of the current UK Stewardship Code. The Trustees will continue to engage with all of their managers on the UK Stewardship Code and its relevance. All of the Scheme’s investment managers confirmed that they are signatories of UN Principles for Responsible Investment.

• The Scheme’s investment performance report is reviewed by the Trustees on a quarterly basis — this includes ratings (both general and specific to ESG) from the investment consultant. All of the managers remained highly rated during the year. The investment performance report includes how each investment manager is delivering against their specific mandates. Where a manager is not performing in line with expectations, the Trustees invite the manager to present to the Trustees in order to understand the performance and outlook for the mandate.

• The Trustees also requested details of relevant engagement activity for the year from each of the Scheme’s investment managers.

• The Scheme’s managers provided examples of instances if they had engaged with companies they were invested in and about to invest in which resulted in a positive outcome. These engagement initiatives were driven mainly through regular engagement meetings with the companies that the managers invest in, or by voting on ESG-related resolutions at companies’ Annual General Meetings.

  • LGIM: over the year, LGIM engaged with companies, regulators and policymakers, to generate sustainable outcomes. They see constructive engagement as the best way to deliver long-term and systemic change.
    • LGIM provided examples of 795 engagements with underlying Companies across Environmental, Social and Governance issues over the year. Of the engagements focused on “environmental” issues, around 76% of which were related to climate change. For example, LGIM contacted Charter Hall Group as part of their Climate Impact Pledge engagement campaign. The company had been identified as lagging LGIM’s minimum expectations for their Climate Impact Pledge Score (a quantitative assessment using around70 metrics). LGIM wrote and had a call with the company in which Charter Hall Group provided more detailed information, with LGIM subsequently upgrading their score.
  • Oakhill: over the year, Oakhill engaged (57 times) with underlying issuers on various topics such as including carbon footprint and Greenhouse Gas emissions targets, Diversity, Equity and Inclusion initiatives, health and safety and local community relations.
    • For example, Oakhill engaged with Sabre over the year to discuss ESG reporting and disclosure, governance within the firm, employee DEI advancement and environmental improvements. Oakhill offered insights on regulatory, disclosure, and market data trends as means to encourage continued transparency and progress on the company’s core ESG initiatives.
  • M&G: over the year, M&G engaged with companies on a wide range of ESG issues. They believe that the long-term success of companies is supported by effective investor stewardship and high standards of corporate governance. They believe that if a company is run well, and sustainably, it is more likely to be successful in the long run.
    • For example, M&G engaged with AIA during the year to encourage the company to increase board diversity. In September 2023, AIA announced the appointment of Ms. Nor Shamsiah Binti Mohd Yunus as an Independent Non-executive Director and a member of the Nomination Committee of the Company. The new addition means AIA now has 3 female directors on the board of directors (23% female representation).
  • Insight: over the year to 31 March 2024 Insight confirmed it conducted approximately 2521 engagements over 850 separate engagement meetings at the firm level. In determining the nature and objectives of an engagement relating to ESG factors, Insight adopt a Double Materiality Framework, whereby their approach is to categorise different themes to describe whether they have a greater impact in terms of their Financial Materiality or their Environmental & Social Materiality.
    • For example, Insight engaged with Heathrow Funding Ltd to encourage them to have their decarbonisation targets approved by Science-Based Targets initiative (SBTi) due to the materiality of the airline industry to carbon emissions. In 2023 the target was approved by SBTi.

Significant votes

DWP released a set of Implementation Statement requirements on 17 June 2022, ‘Reporting on Stewardship and Other Topics through the Statement of Investment Principles and the Implementation Statement: Statutory and Non-Statutory Guidance’ to be adopted in all Implementation Statements for schemes with years on or after 1 October 2022. The most material change was that the Statutory Guidance provides an update on what constitutes a “significant vote”:

• A significant vote is defined as one that is linked to the Scheme’s stewardship priorities or themes
• A vote could also be significant for other reasons, for example, due to the size of holding

Trustees are to include details on why a vote is considered significant and rationale for voting decision.

The Trustees define a significant vote as one which aligns with the broader Environmental, Social and Governance themes, narrowed down by size of holding (in particular votes in relation to the top 5 holdings within the equity fund) during the period from 31 March 2023 to 31 March 2024.

Voting activity

The Trustees have delegated their voting rights to the investment managers. 

Investment managers are expected to provide voting summary reporting (where applicable) on a regular basis, at least annually. 

The Trustees expect to be more active in challenging the investment managers in relation to voting and engagement in the future.  It is expected that, when the investment managers present to the Trustees at future meetings, the Trustees will ask the investment managers to highlight key voting activity and the impact on the portfolio. 

The Trustees do not use the direct services of a proxy voter.  Over the last 12 months the key voting activity within the equity mandates were as follows:

LGIM – Future World Global Equity and Future World Global Equity — GBP currency hedged

• LGIM voted at 5,134 meetings over the year. There were a total of 52,212 resolutions on which LGIM were eligible to vote.
• LGIM has participated in the vote for 99.9% of these resolutions. In 80.3% of these, LGIM voted in support of management, while voting against on 19.5% of the proposals and abstaining from 0.3%.

• Of the top five holdings in the Fund (Amazon, Alphabet, Apple, Microsoft, and NVIDIA), LGIM participated in a substantial number of votes across (greater than 100) across each of the companies over the year to 31 March 2024. LGIM have shared information on the votes cast at the respective Annual General Meetings for each of these companies. An example of some of the votes are outlined here:

• Amazon AGM on 24 May 2023 — LGIM cast 32 separate votes covering environmental, social and governance issues, an example of each is highlighted below:

  • (Governance) — LGIM voted for (against management) the consideration of Pay Disparity between Executives and other employees. LGIM view such reports to be valuable in order to assess pay disparity between executives and employees.

  • (Environmental) — LGIM voted for (against management) a Report on Efforts to Reduce Plastic Use. LGIM believes that improving recyclability of products will have a positive impact on climate change and biodiversity.

  • (Social) — LGIM voted for (against management) a Third-Party Audit on Working Conditions. LGIM believe that shareholders would benefit from increased disclosure through third-party auditing on warehouse working conditions.

• Alphabet AGM on 2 June 2023 — LGIM cast 28 separate votes largely covering Social and Governance issues, an example of each is highlighted below:

  • (Governance) — LGIM voted for (against management) the Recapitalization Plan for all Stock to Have One-vote per Share. A vote in favour is applied as LGIM expects companies to apply a one-share-one-vote standard following their beliefs on shareholder rights.

  • (Social) — LGIM voted for (against management) a Report on Risks of Doing Business in Countries with Significant Human Rights Concerns. LGIM supports such risk assessments as they consider human rights issues to be a material risk to companies.

• Apple AGM on 28 February 2024 — LGIM cast 28 separate votes largely covering Social and Governance issues, an example of each is highlighted below:

  • (Social) — LGIM voted against (in line with management) a report on Risks of Omitting Viewpoint and Ideological Diversity from EEO Policy. LGIM voted in against this proposal as Apple appears to be providing shareholders with sufficient disclosure around its diversity and inclusion efforts and non-discrimination policies, and including viewpoint and ideology in EEO policies does not appear to be a standard industry practice.
  • (Social) — LGIM voted for (against management) a report on median gender and racial pay gap. A vote in favour is applied as LGIM expects companies to disclose meaningful information on its gender pay gap and the initiatives it is applying to close any stated gap.

• Microsoft AGM on 7 December 2023 — LGIM cast 24 separate votes largely covering Social and Governance issues, an example of each is highlighted below:

  • (Governance) — LGIM voted against (in line with management) the election of Satya Nadella as Director.  LGIM confirmed that a vote against was applied as LGIM expects companies to separate the roles of Chair and CEO due to risk management and oversight concerns.

  • (Social) — LGIM voted against (in line with management) a Report on Gender-Based Compensation and Benefits Inequities. LGIM believe the company appears to provide sufficient information for investors to be able to determine how the company is managing pay equity and health and wellness benefits related risks.

• NVIDIA Corporation AGM on 22 June 2023 — LGIM cast 16 separate votes largely covering Governance issues, an example is highlighted below:

  • (Governance) — LGIM voted against (against management) the election of Stephen C. Neal as Director due to diversity concerns. A vote against is applied as LGIM expects a company to have at least one-third women on the board in order to maintain an appropriate mix of independence, relevant skills, experience, tenure, and background.