TPR to tighten supervision to steer schemes’ climate response

It comes as the regulator acknowledged there is “much work” to be done to ensure that the pensions industry can assess and adapt to climate-related risks.

According to the report, published on Thursday, less than half of defined contribution schemes (43 per cent) took account of climate change when formulating their investment strategies and approaches when asked in 2020.

In the report, the regulator said that it will outline its approach to the most recent climate change regulations under the Pensions Schemes Act 2021 by publishing guidance that “clarifies what we will be looking for from schemes as they assess, manage and prepare to report”, primarily centred on Task Force on Climate-related Financial Disclosures reports.

Our report recognises that practices are evolving, and trustees – and savers – are more engaged with the need to consider climate risks. We remain convinced that a landscape of resilient pension schemes that protect savings from climate risk is entirely within reach

Charles Counsell, TPR

Measures under the act only apply to master trusts and larger schemes at present, but by the end of 2023 the regulator anticipates that approximately 90 per cent of DC scheme memberships will be in schemes that are reporting in line with the TCFD recommendations.

Around 75 per cent of defined benefit scheme assets will be in pension funds complying with the regulations, but TPR said the figure for DB memberships is lower, with approximately 60 per cent expected to be covered by the end of 2023.

The regulator said it will publish further guidance on how to consider climate-related risks and opportunities as part of the covenant assessment, and will carry out a thematic review on scheme resilience to climate-related scenarios once schemes start reporting as required.

The information will be used to aid the regulator’s understanding of how savers’ investments could be affected by climate change and will use the findings to inform any revisions to its guidance.

The report also recommended that trustees sign up to the 2020 UK Stewardship Code. The code outlines best practices for companies to improve their investment governance and risk management, while driving long-term success, TPR said.

The regulator added that stewardship activities help trustees to “allocate capital and monitor its deployment to create long-term value for savers”, while also ensuring that schemes can remain resilient amid climate change risks.

Earlier in October, the Department for Work and Pensions told schemes to prioritise stewardship.

Pensions Expert reported that trustees may be compelled to calculate and disclose a portfolio alignment metric, informing scheme members of the extent to which their investments are aligned with the Paris Agreement, while also using the data to identify climate-related risks and opportunities, the DWP said

Supervision and enforcement

The report also acknowledged that lack of climate-related data could be a barrier for schemes adapting to climate change and is encouraging schemes to make robust climate-related reports.

In order to steer the pensions industry, TPR has reinforced its stance on supervising schemes and making enforcement action where necessary, stating that it will commit to using its “supervisory work to encourage trustees to pay more attention to climate change when selecting investments, discussing covenant and working with their advisers”.

Beyond requiring that all schemes publish their statement of investment principles, implementation statement and TCFD report, TPR stated that scheme returns will include new questions, requesting the web addresses for these documents.

The regulator “may take enforcement action” where this is not supplied, while the quality of the reporting may be viewed by TPR as “an indication of the quality of scheme governance”.

According to feedback to TPR’s supervision teams, the pensions industry has warned that the availability of climate-related data can be a significant issue for trustees, and this may be a barrier to developing plans to make schemes more resilient to climate risks.

TPR explained it expects to see improvements in data quality and modelling capabilities as the financial system as a whole moved towards mandatory reporting of climate-related risks and opportunities.

Jessie Wilson, professional trustee at Dalriada Trustees, said: “TPR clearly recognise the systemic risks facing the pensions system posed by climate change, notably through scheme investments and potential threats to employer covenant.”

She noted that the publishing of the TPR’s Climate Change Strategy “doubles down on the its commitment to this area,” where the regulator recognises “a lot needs to be done,” but the key message for trustees can be captured in one final extract from the document, which states “trustees must clearly evidence that words and intentions translate into action”.

She added: “We agree, as meaningful change happens when we move from the talking stage to the implementation stage.

“Yet, we still believe trustees decision making would be better assisted through improved carbon related reporting from investment managers. We believe this should become increasingly standardised and readily available – something akin to current approach to manager performance and risk data.

“We would also add that we recognise the need for simple, cost-effective regulations covering smaller schemes that do not have the governance budgets of the larger schemes.”

Superfunds especially at risk

As part of the ‘Climate adaptation report’, DB superfunds were identified as being particularly vulnerable to the impact of climate change. TPR said that those targeting a long-term run-off could face “very significant” challenges.

In order to combat this, the report stated that a “proactive approach to assessing, mitigating and monitoring climate risk for those models” will be central to achieving successful saver outcomes.

The report stated: “As the DB superfund market evolves, we will seek to ensure that DB superfunds meet our requirement for a ‘climate risk management plan’ and that the plan is effectively implemented. We will do this as part of our initial assessment of individual superfund models, as ceding schemes transfer in and during ongoing supervision.”

‘Much to be done’ to combat climate change

TPR added that “too few schemes give enough consideration to climate-related risks and opportunities”, risking saver outcomes.   

The report explained that while schemes are more engaged, only 43 per cent of DC schemes took account of climate change when formulating their investment strategies and approaches when quizzed in 2020.

A survey of DB schemes in the same year showed that more than half (51 per cent) had not allocated time or resources to assessing any financial risks and opportunities associated with climate change.

TPR stated that while it “does not underestimate the scale of the challenge for occupational pension schemes, it adds that practices are rapidly evolving, and trustees and savers are increasingly more engaged with the need to consider climate-related risks and opportunities”.

Charles Counsell, TPR’s chief executive, said: “The pensions industry still has much work to do to build resilience and assess climate-related risks and opportunities.

“A rapidly warming world brings the risk of more frequent fires, floods or extreme weather — potentially causing the loss of physical assets and supply chain disruption.”

He added that unless properly managed, climate risks have the potential to “impact scheme funding, employer covenant, and leave some savers facing a poorer retirement”.

“Our adaptation report shows much more needs to be done,” Counsell noted.

He said trustees should be considering climate change in their schemes’ investment strategies, allocate sufficient time and resources to assessing financial risks and opportunities associated with climate change, and ensure the process used to manage those risks and opportunities are robust.  

“Our report recognises that practices are evolving, and trustees — and savers — are more engaged with the need to consider climate risks. We remain convinced that a landscape of resilient pensions schemes that protect savings from climate risk is entirely within reach,” he added.