The Pensions and Lifetime Savings Association has warned that government bodies will have “unprecedented new powers” to interfere in pension scheme investment strategies if an amendment to the pension schemes bill is passed.
Baroness Stedman-Scott, a minister for Work and Pensions sitting in the House of Lords, introduced an amendment on Tuesday on environmental, social and governance practices, which means reporting on climate change strategies will become mandatory for pension schemes.
The changes follow a meeting between secretary of state for work and pensions Thérèse Coffey and governor of the Bank of England Mark Carney, who met last week to discuss how to take forward the work of the Taskforce on Climate-Related Financial Disclosures.
The Department for Work and Pensions stated it will launch a consultation on the new rules, which will need to be laid out in secondary legislation.
In theory it paves the way for government to start dictating how pension schemes manage their investments. Surely that’s not the intent? It would fundamentally change the nature of the trustee role
Anna Copestake, Arc Pensions Law
According to the amendment, pension scheme trustees will have to review the impact of climate change in their investment strategy, manage their exposure to these risks and determine targets for their exposure to these pitfalls.
The government already introduced new rules in this area last year. All trust-based occupational pension schemes with at least 100 members are required to prepare and review their statement of investment principles at least every three years or after any significant change in investment policy, including policies on “financially material” considerations.
Since October 2019, defined contribution schemes have been obliged to make their SIP freely available on a website, and a year later they must produce an implementation report that explains how they have followed and acted on the investment policies outlined in the SIP.
Ms Coffey said: “Pension schemes shouldn’t be dragging their heels when it comes to their climate change strategy.
“We’ve already introduced regulations that require pension trustees to set out their policy on climate change, but now we’re taking things a step further.
“I want the UK to continue leading the way on the climate emergency defining the 21st century.”
Rules setting dangerous precedent
Despite fully supporting initiatives that help pension schemes with assessing climate change risks, the PLSA has expressed alarm at the implications of this amendment.
Joe Dabrowski, head of defined benefit, Local Government Pension Scheme and standards at the industry body, said parts of the new amendment “appear to go significantly beyond" the current rules, and would "give unprecedented new powers to government bodies to interfere and request changes to private sector schemes’ investment strategies".
“If that’s the case it would set a dangerous precedent and be wholly inappropriate. Nothing should cut across schemes’ fiduciary duty and freedom to invest in members’ best interests – and this will vary scheme by scheme," he said, urging the government to redraft the bill and clarify its intentions.
Anna Copestake, partner at Arc Pensions Law, agreed that the new rules pave the way, in theory, for government to start dictating how pension schemes manage their investments.
She said: “Surely that’s not the intent? It would fundamentally change the nature of the trustee role. We can’t tell which pension schemes would be affected or what they would have to do.
She said key issues, such as how the new rules would interact with existing SIP legislation, are currently to be clarified by regulation, and echoed the call for clarity from the government.
Schemes risking £50,000 fine
While the new amendment leaves some questions unanswered, it would apply to all occupational pension funds, including defined benefit, and comes with hefty fines for non-compliance: £5,000 in the case of an individual, or £50,000 in any other case.
Penny Cogher, partner at Irwin Mitchell, noted that the amendments were “fairly simply drafted, and there is scope for the secretary of state to issue formal guidance", but added that "what will alarm trustees and scheme managers is the ‘stick’” of penalties from the Pensions Regulator.
She added: “These amendments are a natural development of the new laws on ESG that came into force last year, with the focus firmly on climate change and its impact on scheme investments and investment strategies.
“They are also in line with the views of the many of the public who do want parliament and pension schemes to move ahead more quickly on helping to tackle climate change issues.”
However, Sophia Heathcoat, client strategist at Cardano, questioned whether this legislation is the best way to implement these changes.
She said: “What we need to make sure is that this doesn't just become a tick-box, something else they need to add to their to-do list. There is also going to be a cost to providing this disclosure."
Arguing that the government has sought to put pressure on investors rather than take action directly at a corporate level, she asked:“Is that the best street to take? Shouldn’t there be further climate disclosure requirements in corporate accounting standards instead, that would then give pension schemes the ability to see what the climate impact is?”
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Ms Heathcoat also noted that such requirements will need a clear and standardised approach, so that “the disclosures being made are helpful, impactful, but also comparable”.
“You don't want a set of disclosures where trustees, investment consultants or managers have different interpretations,” she added.
