On the go: More than a quarter of defined benefit pension schemes are only aiming for minimum compliance with new rules and regulations around climate change, the challenge of which should not be underestimated, LCP has warned.

The consultancy’s ‘Chart your own course’ report, combining a market survey and analysis of schemes LCP advises, found that 29 per cent of respondents said their approach to climate change regulations was to achieve minimum compliance, while only 5 per cent said they aimed to be “market leading”.

Additionally, 40 per cent of schemes do not allow for climate change risks on their employer covenant.

“These findings are despite the Pension Schemes Act bringing in specific requirements for larger schemes to enhance their climate governance,” LCP said. 

“Overall, the majority of schemes asked expected there to be little impact on the operation of their pension scheme across all the new requirements in the Pension Schemes Act.”

The “surprisingly benign” impact of the coronavirus pandemic on scheme funding strengthens the need to be vigilant against complacency, it continued.

Mary Spencer, partner and author of the report, said: “While the best-prepared schemes are already on top of climate and regulatory risk, there are some that are not. They can’t afford to ignore the potentially turbulent waters ahead if climate-related risks aren’t put at the top of the agenda.

“Climate regulation is an accelerating force and pension schemes will be left behind the curve unless they make significant changes.”

Impact of pandemic

Meanwhile, LCP’s report found that 84 per cent of schemes now have long-term funding targets in place — up from 75 per cent last year — with 29 per cent expecting to reach these targets within five years.

Surprisingly, most respondents reported that the pandemic had either no impact on all aspects of their scheme, while 29 per cent said there had been a positive impact on funding and investments.

Interest rate and inflation hedging increased over the year, with both now averaging at 82 per cent compared with 75 per cent and 71 per cent respectively pre-pandemic.

Around a third of schemes said their priority for the year ahead was their long-term funding target framework, while roughly a fifth said it was to sort out data and benefits, including guaranteed minimum pensions.

Fully 97 per cent of schemes have not yet seen the need to update their mortality assumptions despite Covid-19, while 95 per cent said the pandemic had made either no impact or even a positive impact on their approaches to governance and decision-making.

The number of schemes intending to make use of the bespoke option in the Pensions Regulator’s new DB funding code has increased significantly, from 19 per cent last year to 40 per cent this year.

Jill Ampleford, partner and author of the report, said: “Our analysis reveals that many schemes are overwhelmed by the number of issues to consider over the coming year, particularly around data and governance. 

“Trustees are having to work hard to think strategically and are focused on agreeing and maintaining a viable long-term funding plan.” 

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