The Pensions Regulator will demand that trustees add more climate change information to their scheme returns, and has promised enforcement action where pension funds do not comply with basic requirements.
The watchdog’s new climate change strategy, published on Wednesday, also revealed TPR will publish new guidance to clarify what it expects from schemes when complying with new rules in this area stemming from the Pension Schemes Act 2021, and update the trustee toolkit with new climate change content.
Currently, trustees must produce a statement of investment principles, to be published online, setting out their policies on financially material environmental, social and governance considerations, including climate change.
This document describes the extent to which non-financial matters are taken into account in the scheme’s investment decisions and their policies on stewardship.
Where we do not see schemes complying with the rules, we will consider enforcement action
David Fairs, TPR
For pension funds that have published their annual reports since October 2020, an implementation statement describing whether certain policies in the scheme’s SIP have been followed and trustees’ voting behaviour also needs to be published.
Adding to this, the Department for Work and Pensions launched in January a consultation on new rules for taking action in this area, which 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 proposals stated 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.
In its new strategy, TPR stated that schemes will need to “publish their SIP, implementation statement and, for those in scope, disclose their TCFD report”.
“Where they do not, and it is appropriate to do so, we will take enforcement action, which we may publicise,” the regulator warned.
New reporting requirements for schemes
To help identify instances of non-compliance, TPR will implement new regulations by adding questions to the scheme return, requesting the web addresses for the mentioned climate change-related documents.
The watchdog has also promised to publish on its website an index of the web addresses of schemes’ SIPs, after a year-long delay in the collection of these statements.
TPR anticipates that by the end of 2023, approximately 90 per cent of defined contribution members will be in schemes that are reporting in line with the TCFD recommendations.
However, although around 75 per cent of defined benefit scheme assets will be in schemes complying with the regulations, the figure for DB memberships is lower, with approximately 60 per cent expected to be covered by the end of 2023, the regulator stated.
Considering that the “impact of climate change on some employers could be very significant, and integration of covenant, actuarial and investment risk is key to successful saver outcomes”, TPR will issue guidance that will specifically consider how to take account of the impact of climate change in integrated risk management, “which will help to engage smaller schemes more with climate-related risks”, it stressed.
The watchdog is also planning on demanding a climate risk management plan from DB consolidators as the superfund market evolves, and will include modules on climate change and stewardship in its new code of practice.
Trustee toolkit to be updated
TPR also announced that it will support the development of trustees’ knowledge and understanding by updating the content on climate change in its toolkit, a request previously made by several industry experts.
David Fairs, TPR’s executive director of regulatory policy, analysis and advice, argued that the new strategy outlines how it “will help trustees comply with the new rules for larger schemes, but it signals work on climate change needs to happen right across the pensions landscape — climate change is a risk for schemes whatever the size or investment strategy”.
He said: “It is clear that all schemes need to build their capacity in this area if they haven’t already.
“This should include devoting more board time to climate change, considering specific training and, most importantly, integrating consideration of climate change right across decision-making.”
The regulator stated that it will use its relationship supervision approach to encourage trustees to pay more attention to climate change in the building of portfolios and investment selection, while also engaging with their investment managers to ensure they steward investments in line the UK Stewardship Code 2020.
Fairs added: “Building capacity means trustees will be better placed to understand what climate-related issues mean for their scheme, and better able to make decisions that contribute to good saver outcomes.
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“Where we do not see schemes complying with the rules, we will consider enforcement action.”
Guy Opperman, minister for pensions and financial inclusion, welcomed the regulator “stepping up on this issue”.
He said: “By increasing oversight of climate change and giving it the weight it deserves they can provide better protection for pension savers from significant financial risk.
“In particular, I applaud the commitment to update the trustee toolkit, and to properly enforce compliance with the basics.”
