Pension Schemes Act 2021 and climate risk reporting

Key points

• The Pension Schemes Act 2021 (PSA 21) gives the government the power to introduce regulations which will require trustees of occupational pension schemes to consider, in-depth, (and report on) how climate change will affect their scheme and its investments in line with the TCFD (Task Force on Climate-related Financial Disclosures) recommendations  
• The new requirements will be detailed in regulations which have been issued in draft and are currently subject to further consultation. As a result, the legal requirements will not take effect immediately.
• The DWP’s policy consultation response and additional consultation was published at the end of January 2021. Along with the consultation were draft regulations and statutory guidance. In the draft regulations, it is proposed that the new requirements will start to apply to schemes with assets of £5 billion or over (as at the end of the first scheme year ending on or after 1 March 2020) from October 2021. Schemes with £1 billion or more of assets will be required to comply from October 2022.
• The requirements will also apply to authorised master trusts and collective defined contribution (CDC) schemes from October 2021.

What are the new requirements on climate-related disclosures?

The long-term objective behind these new requirements is to protect members’ benefits against the physical risks of climate change and ensure that trustees are properly taking into account the risks and opportunities associated with the transition to a lower carbon economy.

• Broadly, regulations made pursuant to the powers introduced by the PSA 21 (together with statutory guidance) will require trustees of relevant occupational pension schemes  to:
  • meet a number of climate change  governance requirements in line with the TCFD (Task Force on Climate-related Financial Disclosures) recommendations ; and
  • to report on how they have complied with those requirements (with that report also being published on a publicly available website and signposted to scheme members).  Trustees must prepare their report within 7 months of their scheme year end date. ;
• introduce a new element to the trustee knowledge and understanding requirements (TKU) to ensure that trustees of relevant schemes have the appropriate level of knowledge and understanding of the principles relating to the identification, assessment and management of  climate change risks and opportunities in relation to occupational pension schemes; and
• give The Pensions Regulator powers to ensure compliance with any governance and reporting requirements, by issuing compliance and penalty notices.

The PSA 21 also introduces a power to make regulations to require  trustees to adopt prescribed assumptions as to future events, including steps that might be taken to achieve the Paris Agreement goal or other climate change goals.

What does this mean for trustees?

These new obligations build on the requirements that have come in over recent years in relation to Environmental, Social and Governance requirements. With the UK hosting COP26 this year, these issues are only set to gain more momentum and as asset owners, trustees have an important part to play in that. 

Compliance with the new requirements will not simply be a box-ticking exercise. Trustees need to understand and engage fully with these issues to be able to demonstrate they have complied with them. Those schemes that will be caught first (and therefore have to comply from 1 October 2021) should start engaging with these issues sooner rather than later.   

What does this mean for scheme sponsors?

Many sponsors will already be engaging from a corporate governance perspective on these issues and will be able to support trustees with the work they need to do (whilst recognising trustees will need to take their own independent advice).

The requirements to publish information by trustees could potentially increase reputational risk for scheme sponsors, particularly given the powers the Pensions Regulator will have to deal with non-compliance. Open and constructive dialogue and collaboration on these issues will be important.

Download our one-page overviews of the Pension Schemes Act 2021