UK Regulator Advises Pension Funds to Seek Expert Help on Climate

Guidance offered to trustees on ‘new and daunting’ climate-related reporting requirements.

The Pensions Regulator (TPR) has issued its final guidance to UK pension scheme trustees of managing climate risk, stating that trustees may need to get expert outside advice.

“Trustees must take responsibility for ensuring their advisers have the appropriate skills and expertise and the advice they offer is relevant, helpful and represents value for money. After all, ultimately it’s trustees who are responsible for any decisions,” said David Fairs, TPR’s Executive Director of Regulatory Policy, Analysis and Advice.

TPR, the UK’s pension watchdog, released its guidance, ‘Governance and reporting of climate-related risks and opportunities’, to complement the Department of Work and Pension’s statutory advice ‘Governance and reporting of climate change risk: guidance for trustees of occupational schemes’. TPR released its draft guidance earlier this year and has continuously warned pension funds not to dismiss climate-reporting duties.

TPR’s guidance gives firm recommendations to pension funds that are not able to keep up with emerging requirements around climate change reporting and mitigation programmes. The guidance includes examples of what steps to take, how to apply legislation, and how to complete an annual climate change report.

“We acknowledge that the requirements of the climate change regulations are new and may appear daunting for trustees,” said TPR’s statement on the guidance. “However, the requirements are formed around the Task Force on Climate-related Financial Disclosure (TCFD) framework, and trustees might benefit from working through the governance and reporting requirements in a structured way.”

In October, TCFD updated its implementation guidance for the first time since 2017. A revised annex included supplemental guidance on decision-useful disclosures by the financial sector across TCFD’s four reporting pillars – governance, strategy, risk management, and metrics and targets – and updated universal and sectoral reporting requirements.

TPR’s guidance offered support for funds struggling with requirements. It said that those funds that fall under its jurisdiction should be engaging in a proper account of climate change when making decisions and offered further advice to those helping transition.

It specified pension funds must have carried out analysis in a way that is consistent with the TCFD recommendations “so that savers and others can be confident in it and that the funds have seriously considered the risks and opportunities that climate change will bring to [the] scheme”.

The Pensions and Lifetime Savings Association (PSLA) welcomed TPR’s guidance, the additional case studies, and a step-by-step guide due in 2022. “We are pleased that our request to see new additions on qualitative scenario analysis has been heard and that this is being taken forward,” said Nigel Peaple, Director Policy & Advocacy, PLSA.

“However, we would welcome more guidance to be made available to trustees in both the toolkit and on the issue of covenant guidance – the employer’s legal obligation and financial ability to support the scheme now and in the future, while integrating new climate change risk with accuracy – still remains.”

Peaple added that climate-aware investing was now at the forefront of many decisions and that funds must acknowledge this. “To ensure that our members are best placed to deal with this continued issue it is vital that more is done to ensure the guidance and toolkits made available are fit for purpose as soon as possible,” he said.

The UK requires climate risks to be considered and reported on by pension schemes under the Pension Schemes Act. Schemes with £5 billion in assets must already comply, with those managing £1 billion in assets liable from October 2022.

TPR’s guidance said that funds should go “as far as they are able” in adhering to climate needs.

This includes undertaking scenario analysis, obtaining Scope 1, 2 and 3 greenhouse gas emissions and other data relevant to the fund’s metrics, using that data to calculate said metrics, using these metrics to identify and assess climate-related risks and opportunities and measuring the performance of the scheme against the target set.

Earlier this month, consultancy Willis Towers Watson said UK pension funds were not adequately preparing for TCFD and that defined benefit pension schemes with under £1 billion in assets were at risk of being left behind the rest of the UK market.

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