Smaller pension schemes may take “box-ticking” approach, as TPR guidance outlines regulator’s expectations.
Trustees beyond the top-tier of UK pension schemes will be “really challenged” to meet impending new climate-related governance and reporting responsibilities, according to Karen Shackleton, Chair and Founder of Pensions for Purpose and independent investment adviser.
Last week, The Pensions Regulator (TPR) issued draft guidance to help trustees meet tougher standards of governance and reporting in relation to climate change risks and opportunities outlined in the UK Government’s Occupational Pension Schemes (Climate Change Governance and Reporting) Regulations 2021. From October, the legislation will apply to authorised schemes, and to those with £5 billion or more in assets. However, it will also apply to schemes with £1 billion or more in assets from 1 October 2022.
“There is an incredible range in terms of knowledge and understanding among trustees,” said Shackleton. While for many trustees the issue is “relatively straightforward”, others will be “really challenged in implementing what is required because they have not yet begun to think about it”.
The requirements bring schemes’ reporting in line with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) and aim to improve the quality of governance and the level of action by trustees in identifying, assessing and managing climate risk.
TPR has invited comment on the guidance during an eight-week consultation period that ends on 31 August. The guidance includes the regulator’s proposed approach to monitoring compliance, specifying activities that schemes ‘must’ and ‘should’ conduct, as well as the imposition of mandatory and discretionary penalties for non-compliance.
David Fairs, TPR’s Executive Director of Regulatory Policy, Analysis and Advice, said the regulator wanted to work with trustees and their advisers “to ensure climate-related risks and opportunities are considered as key elements of scheme governance and we would welcome feedback on the best way to deliver this”.
If trustees do not adequately consider climate-related risks and opportunities, or exercise effective stewardship, pension scheme investment performance and funding may suffer, which could mean savers missing out, he added.
In discussions with trustees, Pensions for Purpose has heard many say the requirements for governance and reporting are “just another thing on my plate” among many other reporting requirements, said Shackleton. “There is a resources issue here, which is why some pension fund trustees have not yet given the issue their time and attention.”
As such, Shackleton is concerned that compliance with climate-related requirements could become a “box-ticking” exercise rather than a “fantastic opportunity for trustees to spend time thinking about how they can green pension funds”.
New research from investment consultants Willis Towers Watson suggests ESG-focused funds are increasingly being offered as the default investment option by defined contribution schemes in the UK. In its FTSE 350 DC Pension Survey 2021, the investment consultants reported that 30% of schemes currently offer an ESG-focused default option, up from 17% in 2020, with 49% of participants expecting to do so in the future.
In its draft guidance, TPR says it will be looking for clear evidence that trustees: are taking proper account of climate change when making decisions about schemes; have carried out analysis that is consistent with TCFD recommendations, have considered the risks and opportunities climate change will bring to their scheme, and have decided what to do as a result of this analysis and set a target to help achieve that goal.
Broader representation on Stewardship Council
To help smaller schemes comply with climate-related and other emerging new obligations, Shackleton also called for broader representation on a new body set up by the UK Government to improve standards of stewardship.
A group of 28 pension schemes – responsible for more than £550 billion of assets and including BT Pension Scheme, Church of England Funded Pension Scheme and RPMI Railpen – convened last week at the inaugural meeting of the Occupational Pensions Stewardship Council.
Established by the Department of Work and Pensions in response to a 2020 report by the Asset Management Taskforce, the Council will provide a platform for pension schemes to share best practice and research on climate change and corporate governance. It is also aimed at occupational pension schemes and Local Government Pension Scheme (LGPS) pools looking to build a greater understanding of stewardship practices.
Shackleton welcomed the launch, observing that pension funds learning from each other would ensure no one would be “reinventing the wheel”. The current members of the Council are well-resourced and may not appreciate the challenges of smaller funds, however. “It would be good to see smaller funds joining the Council so it is representative across all stakeholders.”