6.1 Introduction

Pension funds are considered to be part of the most important institutional investors in the world.1 The role of pension funds in financial markets is rooted to securing financial income when retirees reach an old age, invalidity or death.2 Pension Funds have a guarantee function.3 Employers and employees pay a monthly contribution to a pension fund. These contributions are the assets that become property of the pension fund.4 Pension funds have the obligation to invest the assets and generate profits in benefit of the members of the fund, the beneficiaries.5 Investment risks are shared between generations which reduces risks.6 Pension funds enjoy a reputable position in capital markets given the growing amount of money involved in their retirement systems. Globally, pension funds are estimated to hold USD $30,2 trillion in assets under management.7

Figure 13 – pension funds asset’ growth between 2001 and 20148

Source: OECD, 2015

The primary objective of pension funds systems is to provide adequate retirement income to its beneficiaries.9 Generally pension funds collect retirement savings from employees. To be able to provide financial security to retirees and in the long term, to be able to pay them a pension, pension funds invest their savings. Many questions arise from the way pension funds manage the vast amounts of money collected from the employees. Pension funds are addressed from all fronts regarding, among others, how they deal with the most pressing global challenges, the profitability of their investments in the long-term, the structure of their governance, the sustainability of their investments, fiduciary duty, their portfolio and their responsibility as shareholders. The basic question always being, how will a pension fund succeed to deliver a defined pension to retirees in the long-term? There is nothing easy about answering this long debated question. This chapter looks at how leading pension funds communicate their concerns about the Environmental, Social and Governance (ESG) impact of their investments and of the ESG impacts of the companies they invest in. Their involvement with responsible investment indicates their efforts to increase their chances to succeed in the future. Pension funds, as an example of the world’s largest investors, have the power to influence the uptake of sustainability reporting and responsible investment by committing themselves to responsible business practices and becoming an example to their peers.

Among the most pressing challenges faced by pension funds, is the rapid ageing of the population, unemployment and government debt.10 “Twenty-first Century pension realities include aging populations, rising longevity, slower economic growth, and lower investment returns.” (Keith Ambachtsheer, a Dutch pension fund specialist).11 Without entering the realm of pension economics, Jan Tinbergen, the Dutch economist and Nobel laureate has explained that to achieve the two economic goals of (1) higher long-term returns, while (2) giving safety of pension’ payment to pensioners, two instruments are needed, one for each of the goals.12 This is of course easier said than done, and also, although may be the most important challenge pension funds face, it is not the only one. Globally, pension funds address this challenge in different ways. This chapter looks at the examples of the the Brazilian pension fund PREVI, the Swedish AP funds, Dutch pension funds such as ABP and the US pension fund CalPERS. These pension funds represent the largest responsible pension funds in those four countries. This chapter looks at the four different pension systems, of Brazil, Sweden, tthe Netherlands and the US, and provides information about how different pension funds from different pension systems address the topics of sustainability reporting and responsible investment. As the Organization for Economic Cooperation and Development (OECD) explains “Retirement-income systems are diverse and often involve a number of different programmes. Classifying pension systems and different retirement-income schemes is consequentially difficult.”13 Building on the same understanding, the Melbourne Mercer Global Pension Index (MMGPI), explains “(…) any comparison of systems is likely to be controversial as each system has evolved from that country’s particular economic, social, cultural, political and historical circumstances.”14 I argue that long term thinking and a responsible investment strategy, through the integration and disclosure of Environmental, Social and Governance (ESG) risks, may increase the chances of succeeding in achieving Jan Tinbergen’s two economic goals of higher long-term returns and securing the safety of pension’ payment to pensioners in the future.

Generally, pension funds are based on a three pillar structure. The first pillar comprises the mandatory and public basic state pension under a statutory insurance scheme; the second pillar comprises the mandatory and private supplementary pension schemes through the employer; and the third pillar comprises the voluntary and private savings for retirement.15 This chapter focuses mainly on the second pillar (with the exception of Sweden, in which the focus is on the AP funds part of the first pillar) which is the mandated and fully funded occupational pension plans with financial assets, as it is important for employers to deal responsibly with their employees’ money and it is part of their fiduciary duty.16 Some of the characteristics and rules that apply to industry wide pension funds, although it is not this chapter’s focus, also apply to corporate pension funds and life insurance undertakings. The focus will further be in the four countries studied, Brazil, Sweden, the Netherlands and the US, and it is illustrated with a domestic pension fund example, as mentioned above.