On the go: The Treasury committee published on Thursday a unanimously agreed report as part of its decarbonisation and green finance inquiry, which calls for environmental, social and governance regulations for smaller schemes.
In the report, the committee made a series of recommendations for how the government can achieve net-zero by 2050.
In its specific guidelines for the pensions sector, the MPs argued that the Pensions Regulator “will need to consider how to reach smaller pension schemes” when implementing the new regulations on ESG requirements.
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.
For pension funds with assets above £1bn, the requirements will come into force from October 2022, with the same seven-month deadline after that.
The Department for Work and Pensions consultation detailed that schemes would remain in scope until assets fall below £500m at scheme year-end.
However, the Treasury committee stated that ”the draft regulations appear to exclude the smallest trust schemes”.
When the effects of the small schemes are “aggregated, they may still have an impact on meeting the net-zero target”, the MPs stated.
The government should set out how these smaller funds will be encouraged to integrate climate governance and reporting requirements, the report added
TPR has been approached for comment.
Elsewhere, the MPs stated that “there is a high level of inertia among consumers around defined contribution pension fund choice, with most remaining in the default fund”.
According to the report, the Treasury “has been robust in its view that default funds should not be required to move to more green alternatives, but at the same time maintains that consumers should not have to switch out of the default fund to invest sustainably”.
In the committee’s view, the government “should resolve this apparent contradiction”, as it currently “is relying on a blend of disclosure, regulation and public investment to foster a transition towards more sustainable investment”.
The MPs stated that for now they will support the approach, but the ”Treasury should report regularly on the proportion of pension holders in DC pension schemes who remain in the default fund, and the extent to which those default funds are aligned with a path to net-zero”.
