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Managing risks and uncertainty in our investments

Find out how the Trustee, supported by Railpen, manages risk and uncertainty to help support the long-term security, affordability and sustainability of the Scheme.

Railpen currently manages more than £34 billion in assets on behalf of the Trustee. Some of these assets come from the contributions paid by members and employers, while a much larger proportion comes from investment returns. In fact, for every £1 the Scheme pays out, around 75p comes from investment growth.

This means investment decisions can play an important role in supporting good outcomes for members today and in the future. That’s why a significant part of Railpen’s investment approach is focused on understanding and managing risk and uncertainty.

Investing means managing uncertainty

Economic conditions change, markets move, and longer-term issues can affect how companies and assets perform. While uncertainty cannot be removed completely, risks can be actively managed and monitored over the long term.

One of the main ways Railpen does this is through diversification.

This means spreading the Scheme’s investments across different asset classes, such as company shares, bonds, and physical assets, like property or infrastructure, as well as different industries and countries, rather than relying too heavily on any one area. This helps reduce the impact if one investment performs less well, because others can help balance this over time.

Another important principle is taking a long-term view.

Pensions are long term by nature. Some of the railway pension schemes’ 350,000 members are already receiving their pension, while others may not retire for many years. This means Railpen can look beyond short-term market movements and focus on the issues that could affect the Scheme over the decades ahead.

This includes considering a wide range of risks and uncertainties, such as inflation, market changes and global events, as well as longer-term factors such as climate change.

Why climate change matters to pension schemes

Climate change is not just an environmental issue. It can also have financial implications for pension schemes and investment portfolios over time.

Climate-related risks can affect:

the companies and assets in which pension schemes invest
the wider economy and financial markets
sponsoring employers and the industries in which they operate
the long-term cost of providing pension benefits

Because climate change affects so many parts of the economy, these risks cannot be avoided completely. Changes in legislation, emerging technologies and the transition to a lower-carbon economy can all affect industries in different ways. Physical risks, such as more frequent extreme weather events, can also affect businesses, infrastructure and supply chains.

This is why the Trustee, supported by Railpen, considers climate-related risks and opportunities as part of its wider approach to investment risk management.

In practice, this includes:

• taking climate-related risks into account when making investment decisions

• engaging with investee companies on how they identify and manage these risks

• choosing not to invest in some areas where the risks are considered too great

Railpen also looks for suitable investment opportunities linked to the transition to a lower-carbon economy, where these support the needs of the Scheme.

For example, Railpen currently has a 50% stake in AGR Power (AGR), a leading London-based renewable energy and sustainable infrastructure developer. It has also invested more than £500 million in UK energy infrastructure projects since 2019.

Understanding climate-related risk in more detail

The latest Task Force on Climate-related Financial Disclosures (TCFD) Report provides further detail on how climate-related risks and opportunities are identified, assessed and managed.

The report also outlines progress towards the railways pension schemes' climate objectives, including halving their carbon footprint by 2030 and achieving net zero by 2050 or sooner.

You can read the TCFD report in full at railwayspensions.co.uk/tcfd

Helping members understand how their pension is invested

We appreciate that many members may not realise that their pension is invested or understand how those investments help support their long-term financial future. Improving understanding in these areas can help members feel more informed and reassured about how their pension is managed.

To help with this we're running a series of articles like this one on the member website for the Railways Pension Scheme (RPS). These articles explain how pension scheme assets are invested, how investment risks are managed and how Railpen acts as a responsible investor on behalf of the Trustee.

The member websites for RPS and the British Transport Police Superannuation Fund (BTPFSF) also contain dedicated investments sections, bringing together information about Railpen's investment approach and how it supports the long-term security, affordability and sustainability of the Scheme.

You may find these resources useful when responding to member questions about investments and pension scheme assets and are welcome to share them with your members where appropriate.

You can also find out more about Railpen, our investment approach and how we support the railways pension schemes at railpen.com

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