AA Pension Scheme’s recently published TCFD report, dated 31 March 2025, details the Scheme’s management of climate-related risks and opportunities, including progress on data quality and carbon emissions, and outlines future investment intentions.
Allocation Adjustments Reflect De-risking and Climate Considerations
For the fiscal year ending 31 March 2025, the Scheme reported several allocation changes. The VLK Liquid Growth mandate increased from 14.6% to 24.3% of the portfolio. This increase was achieved through redemptions from private assets, with the rationale being to explore climate-related opportunities with VLK and leverage their sustainability credentials (page 4, AA Pension Scheme TCFD report, 31 March 2025).
Conversely, the allocation to Alternatives decreased from 1.9% to 3.4%, and the LDI allocation decreased from 33.4% to 29.6%. The AIL Delegated Mandate, which held 1.6% in the prior year, is no longer present in the current allocation. Property (Direct & Indirect Exposure) decreased from 13.3% to 7.2%, and Real Estate Debt decreased from 2.2% to 1.4%. Illiquid Credit saw a reduction from 16.3% to 15.0%, while Private Equity increased from 10.2% to 11.8%. The ABS allocation slightly increased from 5.3% to 5.7% (page 4-5, AA Pension Scheme TCFD report, 31 March 2025).
Regarding private assets, the Scheme is not planning to add additional private assets, and the allocation to this category will reduce over time as current investments mature. The majority of private asset funds are in the process of redemption or at later stages of deploying capital, limiting the scope for engagement with managers (page 5, AA Pension Scheme TCFD report, 31 March 2025).
Strategic Exploration of Climate-Related Opportunities
The Scheme is actively exploring climate-related opportunities within its existing mandates. The VLK Liquid Growth portfolio, which constitutes approximately 25% of the total portfolio and has a material exposure to return-seeking assets, offers climate-related investment opportunities. As of 31 March 2025, approximately 70% of this portfolio is allocated to equity, including investments in developing new technologies and processes such as renewable energy and carbon capture. The Scheme expects to increase its allocation to this portfolio over the next five years (page 19, AA Pension Scheme TCFD report, 31 March 2025).
Opportunities in ABS are considered somewhat limited due to their dependence on underlying loans. However, the industry has seen the introduction of green mortgage-backed securities, allowing exposure to assets that contribute less to climate risk. There may also be scope for lenders to perform checks on borrowers to assess climate risk, applying green factors to loans (page 19, AA Pension Scheme TCFD report, 31 March 2025).
Manager Engagement on Climate Risk Integration
Over the year to 31 March 2025, the Investment Committee (IC) met with several illiquid credit, private equity, and growth managers to question their integration of sustainability-related issues. The IC reports to the Trustee board on climate-related developments at least annually (page 24, AA Pension Scheme TCFD report, 31 March 2025).
Insight was appointed to manage the LDI mandate and will consider the use of green gilts where appropriate. Insight is also making progress to improve emissions reporting on derivatives. Insight was also appointed to manage the ABS allocation, and the Scheme noted their sustainability credentials (page 5, AA Pension Scheme TCFD report, 31 March 2025).
Source