Governments can do many things to help tackle climate change. Insulation in older houses is in the news. New houses matter too. I know of a new housing estate, under construction now, with a gas boiler in every home. No heat pumps. No solar panels. Planning laws could be tweaked to make that impossible (or financially unattractive). But no such tweak has happened to date, although it is reported to be under consideration by the government.
Yet laws have been tweaked to put regulatory and other pressures onto pension scheme trustees to consider holding green assets. (Interestingly, pension scheme trustees, but not charity trustees.)
And now the government is helpfully addressing the new demand for green assets (which its regulations created) by issuing a green asset. The first “green gilts”, issued this month, were over-subscribed despite having, overall, a yield 1.5bp lower than the nearest equivalent traditional gilt. That’s the “greenium” which the sponsor of a DB scheme (or the member of a DC scheme – including most automatically enrolled members) would pay to the Treasury, in the form of a lower return for essentially the same asset.
For that recurring, annually-compounded price, what do they get? (1) A green-tinted gilt instead of the equivalent gilt-edged gilt. (2) A slightly salved conscience. (But only if they (a) are aware of, (b) understand, and (c) agree with, the investment decision that has been made at their expense.)
Fine, I suppose. But… don’t low gilt yields make DB pension liability values appear higher? Haven’t low gilt yields already resulted in many employers paying increased deficit reduction contributions? Hasn’t this hastened the end of DB pension provision and made annuities very expensive for DC members? So why would a DB trustee – or any trustee – buy a green bond, with an even lower yield?