Government to legislate soon on scheme investment in illiquids

Speaking to the Pensions and Lifetime Savings Association’s ESG conference on March 10, Thérèse Coffey also revealed that rules to align trustees’ climate reporting with the goals of the Paris Agreement will come into force on October 1 this year.

Coffey said the government was “giving schemes greater flexibility to invest in productive finance — in real assets, like infrastructure and innovative businesses of tomorrow”.

Speaking in an earlier session at the PLSA’s conference, Conservative MP Alexander Stafford, who chairs the All-Party Parliamentary Group for ESG, had revealed that the government is preparing to regulate further in order to achieve consistency on environmental, social and governance standards across the private sector.

We know that limits to data coverage for certain asset classes present challenges

Thérèse Coffey

Government will lift barriers to investment

UK pension schemes have been busy diversifying their asset portfolios in recent years, with demand for green infrastructure often outstripping supply.

The government has been keen for Local Government Pension Scheme funds in particular to assist with its ‘levelling up’ agenda.

In February, it set out plans for LGPS funds to outline how they could invest up to 5 per cent of their assets in domestic initiatives, attracting criticism from some schemes.

Coffey described pension schemes as a “potential superpower in the fight against climate change”, and said that she wanted to help schemes invest in real assets.

“We will bring forward legislation shortly to remove barriers that currently prevent schemes from being able to invest in more assets like these, if they feel that would benefit their members,” she said. 

However, she did not provide a timetable for the introduction of this legislation.

Trustees will be asked to do what they can

Coffey did, nevertheless, inform the conference that plans to compel trustees to report on a new “portfolio alignment” metric will come into play at the start of October.

The Department for Work and Pensions launched a consultation on the matter in October 2021, which closed at the start of this year.

The metric is designed to tell scheme members of the extent to which their portfolios are aligned with Paris Agreement targets.

It will be the fourth metric to be included in schemes’ Task Force on Climate-related Financial Disclosures reports.

“As well as looking to remove barriers to support investment, we have been focused on carefully putting in place a world-leading regulatory system of accountability and transparency,” Coffey said.

In the summer, regulations will be brought forward before parliament. Trustees will be able to select a portfolio alignment tool that reflects their circumstances, including their investment strategy and governance capacity, she added.

“We know that limits to data coverage for certain asset classes present challenges,” she admitted.

“However, they are not sufficient to delay action. And, given the data gaps that currently exist, trustees will only be required to calculate Paris alignment as far as they are able.”

Coffey also revealed that, in the next few months, the DWP will publish guidance on the Paris alignment metric and also on the stewardship function of trustees.

Pete Searle, the DWP’s policy director for private pensions and arm’s length bodies, told the conference that there was no enforcement date for any changes following the department’s consultation on stewardship.

He also said that schemes were not being pushed to divest Russian assets in response to the crisis in Ukraine, despite a number of prominent pension funds opting to do so.

“Morally, would it help?” he asked. “Would […] divesting and giving the assets, who knows, to hedge funds or investors from Russia at vastly deflated value, would that actually help address the issue that’s going on in Ukraine? Quite possibly not.”