- The Pensions Regulator (TPR) is clear: act now to protect savers from future climate impacts, or risk the consequences: “Any scheme that does not consider climate change is ignoring a major risk to pension savings and missing out on investment opportunities”.
- To use its own words, the Pension Schemes Act 2021 (PSA 2021) provides TPR with a “vital framework for action and driving development” on climate change. Regulations made under the PSA 2021 will require trustees of occupational pension schemes to consider and report on how climate change will affect their scheme and its investments and report on this, in line with the Task Force on Climate-related Financial Disclosures (TCFD) recommendations. This is aligned with the Government’s aim to ensure that larger asset owners are reporting in line with the TCFD by 2022 and ultimately for domestic net-zero greenhouse gas emissions by 2050.
- While the PSA 2021 requirements apply to the largest schemes first, TPR predicts that 90% of DC schemes and 60% of DB schemes will report in line with TCFD recommendations by the end of 2023. Many smaller schemes are already obliged to report on climate change as a financial factor in line with policies in their SIP.
- Climate change risk is directly relevant to TPR’s own statutory objective of protecting member benefits. Its climate change strategy sets out its further aims and objectives in this area and identifies how it can help support trustees to meet the challenges. At the same time, TPR reminds trustees of its ability to flex its enforcement powers to ensure compliance.
What are TPR’s aims and objectives?
- To create better outcomes for workplace savers by driving trustee action: TPR commits to regulating and, if necessary, enforcing the new climate change-related duties under the PSA 2021 and the existing ESG obligations relating to the SIP and Implementation Statement. TPR undertakes to be clear about its expectations and to publish guidance on its approach to the new TCFD requirements to support trustees.
- To influence debates involving pension schemes and climate change: TPR commits to working with government and industry to participate in and influence debates, align plans, and share insights with other financial regulators. It also plans to use its communications tools and media opportunities to promote collaboration and nudge those managing pension schemes.
- To participate in the transition to net-zero: TPR aims to reduce its own environmental impact, setting an ambitious target of net-zero carbon emissions by 2030 (albeit as a non-asset owner). TPR will publish its Climate Adaptation Report in late 2021 to identify scheme responses to, and management of, climate risks and opportunities.
TPR’s regulatory approach
- Setting clear expectations: TPR aims to clarify expectations in terms of schemes’ assessment, management, and reporting of climate change risks. It also commits to publishing guidance as regulations under the PSA 2021 are implemented. The guidance will specifically cover how to take account of climate change in integrated risk management as TPR recognises that the impact of climate change on some employers could be significant. Best practice TCFD reports will also be shared so that other schemes can benefit from the experience of such schemes. To further communicate its expectations, TPR will also:
- Include modules on climate change and stewardship in its new modular code of practice; and
- Update the climate change content in the Trustee Toolkit.
- Identifying risk early: TPR points out that DC savings will be directly affected by exposure to firms who are unprepared for the low carbon transition; as a result, TPR sees particular urgency for DC schemes where trustee decisions have a direct impact. TPR will help evaluate the extent of the financial risk that climate change presents for scheme investment strategies and sponsoring employers. It will examine scheme resilience to climate-related scenarios by reviewing the reports on scenario analysis. TPR will also review reports on stewardship and engagement activities in implementation statements and it will publish its findings.
- Driving compliance through supervision and enforcement: TPR will continue to foster strong relationships with trustees through relationship supervision; it is training its staff on climate change. TPR expects all schemes to achieve compliance with the new requirements and observes that inadequate reporting may indicate to TPR that scheme governance is also inadequate. New questions will be added to the scheme return requesting the web address where the climate change-related documents can be found and TPR will publish an index of the web addresses of scheme SIPs.
- Working with others: TPR recognises the strength in collaboration with other regulators to achieve an effective and consistent approach to climate change risk. It builds upon its previous collaborations with Government and other financial regulators to share insights, encourage consistent behaviours and ensure high-quality information for trustees to develop and assess performance against metrics and targets.
What does this mean for trustees?
TPR sees trustee action at the heart of its climate approach. Whilst highlighting the importance of its supervisory and enforcement powers, TPR is focussed on supporting trustees, particularly by improving its guidance to ensure it is up-to-date and informed by trustee practice. It also hopes to work with its regulatory partners to improve support across the board. This guidance will be crucial in helping trustees navigate their way through the new reporting regime, particularly where a lot of schemes are already feeling the pressure of the ever-growing regulatory requirements. TPR aims to improve trustee understanding of its expectations and avoid non-compliance. Trustees would be wise to take advantage of such support as non-compliance with climate duties could be costly reputation-wise as ESG issues continue to loom large for investors and stakeholders.
About the author(s)
Mary advises both trustees and employers on the full spectrum of pensions matters. Her recent work includes helping trustee clients manage their interactions with the Pensions Regulator, advising on all forms of risk transfer, GMP equalisation projects and data protection and cyber security issues.