Pension scheme trustees challenged over climate change reporting

The Department for Work and Pensions (DWP) is consulting on proposed legislation requiring occupational pension schemes to improve their climate risk governance and reporting, which has come under fire from the sector’s regulator

The new regulations will require occupational pension schemes to have – and report on – effective governance, strategy, risk management and accompanying metrics and targets for the assessment and management of climate-related risks and opportunities.

A key requirement is that pension schemes report disclosure aligned with the taskforce on climate-related financial disclosures (TCFD) framework.

Since an earlier consultation in this area, the government has announced its intention to make TCFD-aligned disclosures mandatory across the economy by 2025, with a significant portion of mandatory requirements in place by 2023.

The new regulations would require trustees to meet climate change governance requirements which underpin the 11 recommendations of the TCFD, and to report on how they have done so. Statutory guidance, which trustees must have regard to, will set out how trustees should meet the requirements and report in line with the TCFD recommendations.

The latest consultation acknowledges that responses by trustees of large pension schemes to October 2019 letters from the Minister for Pensions and Financial Inclusion indicated the need for a legislative nudge, with only 42% of the largest schemes making any TCFD-aligned disclosures or having plans to do so in the next 12 months.

DWP says it is mandating a proportionate approach. Trustees would be required to carry out scenario analysis and obtain data to calculate their chosen metrics ‘as far as they are able’.

This is defined in the draft regulations to mean that trustees are expected to take all such steps as are reasonable and proportionate in the particular circumstances, taking into account the costs incurred, or likely to be incurred, by the scheme and the time required to be spent by the trustees, or anyone acting on their behalf.

Trustees must select a minimum of two emissions-based metrics, one of which must be an absolute measure of emissions and one which must be an intensity-based measure of emissions, as well as one additional climate-related metric.

However, DWP acknowledged that the continuing rapid evolution of methodologies still poses the risk that different approaches could lead to different results being calculated for the same portfolio/assets.

The department indicated it will be consulting later on the use of one particular metric, ‘implied temperature rise’ (ITR) which is emerging as potentially the most useful and powerful.

A common TCFD report publication deadline will apply for all schemes in scope of seven months from their respective scheme year end.

The ‘reference date’ used for the purposes of determining whether a scheme is in scope, has been changed from 1 June 2020 to 1 March 2020 for the first wave of schemes in scope, and from 1 June 2021 to 1 March 2021 for the second wave.

Trustees must undertake scenario analysis in the first year and every three years thereafter. In other years they must review whether or not circumstances are such that they should refresh their analysis, or, if they decide not to, explain why.

Reporting duties will not apply to trustees of non-authorised schemes where the scheme’s relevant assets are zero at scheme year end.

DWP has brought forward the start date for the review of the requirements to the second half of 2023.

DWP’s consultation on the proposals closes on 10 March.

Defined contribution schemes

Separately, research by The Pensions Regulator (TPR) revealed that while the number of defined contribution (DC) schemes whose trustees are considering climate change in their investment strategies has doubled since 2019, it still stands at just 43%.

The annual survey found that of those schemes whose trustees had not considered climate change in their investment strategies, 19% were planning to review this, but a larger proportion (21%) felt climate change was not relevant to their scheme.

The pre-Covid survey was carried out across 200 single-employer and multi-employer group schemes and 16 master trusts between January and March 2020 before the first national Covid-19 lockdown.

David Fairs, TPR’s executive director of regulatory policy, analysis and advice, said: ‘Our survey shows trustees of DC schemes must give greater attention to the risks and opportunities facing their schemes from climate change.

‘The Pension Schemes Bill – which we expect will become law very soon – will see requirements for the effective governance of climate change risks and opportunities written explicitly into pensions law in the most comprehensive way to date.

‘Trustees already need to consider climate change as part of their statement of investment principles, but the new Act will significantly increase the expectations placed upon them.

‘Although a phased approach means the new Act won’t affect all DC schemes to start with, it will increase the expectations savers have of those responsible for their pension pots when it comes to climate change.

‘Climate change risks will threaten pension savings right across the industry. This means trustees should build their capacity in this area now, so they can understand what climate change will mean for their scheme and so be better placed to make decisions contributing towards good outcomes for savers.’

TPR is, for the first time, set to publish a strategy setting out how the regulator will help trustees meet challenges around climate change later this spring.

Paul Tinslay, a professional trustee at Dalriada Trustees, said: ‘TPR’s guidance in the spring will be warmly welcomed. For some lay trustees, the difficulty can be how to consider climate change and what, realistically, can be done, particularly for small schemes using pooled funds.  

‘The expected Pensions Schemes Act 2021 will further emphasise the importance of assessing climate change, although legislation does already exist.

‘With the transposition of the IORP II requirements into UK law in January 2019 (SI 1103), even schemes with less than 100 members must evidence that they include consideration of environmental, social and governance factors related to investment assets in investment decisions.

‘However, TPR’s much anticipated “Super Code” is needed to formally trigger these requirements.’

Taking action on climate risk: improving governance and reporting by occupational pension schemes – response and consultation on regulations

TPR Defined Contribution trust-based pension schemes research  

Pat Sweet |Reporter, Accountancy Daily [2010-2021]

Pat Sweet was the former online reporter at Accountancy Daily and contributor to the monthly Accountancy magazine, pub...

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