Concerns remain as DWP’s climate change consultation closes

There are several issues on climate change on which the pensions industry would like more clarification from government, according to several responses to the Department for Work and Pensions’ consultation in this area.

Launched in January, the new proposals for taking action on climate risk included broadening the scope of climate risk analysis to cover not just the environmental impact of pension schemes’ portfolios, but also sponsor covenants and actuarial valuations.

The new rules state that schemes with assets of £5bn or more will have to meet the new governance requirements from October 2021, and their trustees must publish a Task Force on Climate-related Financial Disclosures report within seven months of the end of the scheme year.

Perhaps inevitably, given the government’s ambitions for change and the utter scale of the wider issue of climate change, there remains a risk of spurious data gathering and calculations in this area

Stewart Hastie, ACA

The document, which contained a wide-ranging suite of measures, included a number of changes to the initial rules proposed by the DWP in August last year.

‘Aspirational’ proposals risk ‘herd mentality’

Commenting at the close of the consultation, Stewart Hastie, head of the Association of Consulting Actuaries’ climate risk group, noted the “number of changes from the initial proposals, which are a positive response to some of the practical issues identified”, and said that “the proposed statutory guidance is helpful”.

He also noted the government’s clear intent to get schemes reporting on their climate impact, and that “the guidance is intentionally aspirational at the current time — which we support — and helpfully this has been acknowledged with the repeated ‘as far as they are able to’ provision”.

However, he said that “there remains a lot for trustees to take in and do”, while they would be “relying on an industry that is still working out exactly what is available, what is relevant, and how to assess the impact of future climate scenarios”.

The ACA’s response to the consultation “notes that perhaps inevitably, given the government’s ambitions for change and the utter scale of the wider issue of climate change, there remains a risk of spurious data gathering and calculations in this area”, Hastie continued.

The industry body has expressed concern “at the risk of a herd mentality when it comes to metrics and targets”, and also “around the possibility of disproportionately diverting trustees’ resources away from focusing on other major pensions risks”.

Hastie added that the Pensions Regulator will have “a major role to play” in helping schemes “understand what ‘good enough’ looks like”, pointing out that the ACA has “called for TPR to produce an annual statement along these lines”.

SPP calls for more clarity

In its own response to the consultation, the Society of Pension Professionals called for more clarity around a number of measures, not least the requirements for “trustee knowledge and understanding”.

The requirement in its present form is that trustees must demonstrate an “appropriate degree of knowledge and understanding of the principles relating to the identification, assessment and management of climate change risks and opportunities”.

However, the professional body noted that the timing of these requirements “could be clearer”, as well as the fact that the “guidance on [trustee knowledge and understanding] is ‘carved out’ of the statutory guidance and so trustees will not be expected to report on it in their TCFD reports”.

The SPP officials assume that “this is the policy intention, although this is not specifically addressed in the consultation”, and that it would be helpful to understand the government’s rationale when it publishes its response.

The professional body also queried the language around the scenario analysis requirements, which it noted “may cause confusion” as it is unclear exactly when in a scheme’s year the analysis must be begun, carried out and completed.

Additionally, it recommended that the DWP makes clear in its guidance that targets must be compatible with trustees’ overarching fiduciary responsibilities, while providing additional clarity on how metrics should be calculated for certain, “rapidly developing” asset classes, like sovereign bonds and derivatives.

Schemes’ costs underestimated

Carolyn Schuster-Woldan, managing director in the investment consulting team at Redington, criticised what she parsed as the continuing underestimation of costs in the DWP’s impact assessment.

“Though we broadly agree with the breakdowns for familiarisation, scenario analysis, metrics and producing the report, the impact assessment does not reflect the outlay schemes will face in the first year of compliance,” she said.

The DWP “must be mindful” that most pension schemes do not yet have the required governance and risk management processes in place, and it will take time for schemes to fall in line. 

Schuster-Wolden suggested the DWP should “undertake a survey after the first year of regulatory compliance, asking what the actual costs have been in terms of additional trustee, in-house consultant and asset manager time and resource”.

Pensions Expert reported on March 3 that the DWP intends to lay out regulations stemming from this consultation in the summer to come into force ahead of COP26.

Pensions minister Guy Opperman said: “This will make the UK the first major economy in the world to legislate for, and bring into practice, the recommendations of the TCFD, ensuring climate change is at the heart of the pensions system.”