Stop, collaborate and listen: TPR consults on its climate reporting guidance and enforcement approach

From 1 October 2021, phased implementation of new climate-related reporting requirements under the Pension Schemes Act 2021 begins. The Pensions Regulator (TPR) launched a consultation on 5 July 2021 (closing 31 August 2021) to seek views on its draft guidance on the requirements and a new draft appendix to its monetary penalties policy explaining its enforcement approach. Gowling WLG is planning to respond to the consultation. If you have any thoughts or suggestions that you would like us to incorporate into our response then please let us know before the deadline and we would be happy to consider including these.

Key points

• New requirements are introduced by the Occupational Pension Schemes (Climate Change Governance and Reporting) Regulations 2021 and the Occupational Pension Schemes (Climate Change Governance and Reporting) (Miscellaneous Provisions and Amendments) Regulations 2021 (CCGR Regulations) requiring trustees to take steps to identify, assess and manage climate-related risks and opportunities and report on what they have done. These new requirements are based on recommendations from the Taskforce on Climate-related Financial Disclosures (the TCFD).
• The requirements apply to trustees of the largest schemes first: those managing schemes with assets of £5 billion or more and the trustees of authorised master trusts and collective defined contribution schemes. The first wave of trustees must comply from 1 October 2021; broadly, schemes with assets of £1 billion or more must comply from 1 October 2022.
• Following a request from respondents to the DWP consultation on the climate change governance and reporting requirements, TPR has issued guidance (including helpful examples) to support trustees in meeting their new obligations. This guidance is intended to supplement DWP guidance in this area.
• The message is clear: trustees must work with their service providers to develop a plan of action on how they will address climate-related risks and opportunities. The direction of travel on this is linear as the climate emergency worsens.
• Key considerations include enabling members to be able to assess the impact of the scheme’s climate related risks and opportunities on their savings and trustee knowledge and understanding (TKU). As the science develops, trustees should ensure they are comfortable identifying, assessing and managing climate-related risks and opportunities, not least so that they can understand any advice or information received.
• Trustees who do not address these requirements satisfactorily (or at all) could face a mandatory penalty of a minimum of £2,500 and up to a maximum of £50,000 for certain types of trustees as well as discretionary penalties or other enforcement action.
• TPR is seeking views on the clarity and utility of its draft documentation. Trustees would do well to get comfortable with the content of this documentation to ensure they are ready to tackle the requirements when (or if) they are affected.

• HM Treasury has published an interim report and roadmap to mandatory TCFD disclosures across the UK economy by 2025, including specific plans for asset managers, which will support trustees in meeting their own obligations.

TPR draft guidance on governance and reporting of climate related risks and opportunities

TPR will consider the following questions when assessing whether affected trustees have met the requirements. Clear evidence must demonstrate that trustees have:

• taken proper account of climate change when making decisions about the scheme, and advisers are helping the trustees do this;
• carried out their analysis in a way that is consistent with TCFD recommendations;
• seriously considered the risks and opportunities that climate change will bring to their particular scheme;
• decided what to do as a result of this analysis and set a target to help achieve that goal.

For each section of the draft guidance, TPR suggests example steps to take and lists what should appear in the TCFD report. We have highlighted some of TPR’s ‘example steps’ below:

Governance

• Include the structure for making climate-related decisions, responsibility for oversight, how this work is integrated into the wider scheme plans, monitoring framework and meeting cycle in the TCFD report. The terms of reference for the relevant overseeing committee may need amendment.
• Review whether service providers have sufficient skills and resources to address climate-related risks and opportunities and provide data on this to the scheme. The Investment Consultants Sustainability Working Group published a guide suggests five themes against which trustees’ investment managers should demonstrate their ‘climate competency’, which could assist trustees with this assessment.

Strategy and scenario analysis

• Trustees will need to identify suitable time periods to plug into to their scenario analysis (i.e. to assess the potential impact on scheme assets, liabilities and the resilience of its investment strategy (or funding strategy, for DB schemes) following increases in global average temperatures) taking account of the type of benefits payable, membership profile and the time over which member payments will be made as well as how the these factors are likely to develop over those time periods.
• Findings should be clearly documented and incorporated into the wider governance of climate-related risks and opportunities within overall risk management.

Risk management

• Arrange for the full Trustee Board to have training on climate-related risks and opportunities.
• Prepare a climate risk and opportunity dashboard to include in normal reporting. For DB schemes, a section of this dashboard should cover funding and covenant. TPR have a suggested template for this.

Metrics

• DWP guidance recommends metrics which can be considered alongside scenario analysis in order to select at least three metrics for the scheme. These should be reviewed regularly, including after significant changes to investment arrangements, and the information used to inform risk management.

Targets

• Identify a framework for meeting one or more targets, including a defined time period in which to do so. TPR states that a long-term target of over 10 years without any interim targets would need to be explained in the TCFD report and believes that trustees will be able to manage climate risks and opportunities more effectively with a framework that includes interim targets.

TPR guidance on the TCFD Report

Trustees must produce and publish the TCFD report within seven months of the end of any scheme year in which trustees were subject to the requirements. The report should summarise the main findings in plain English and be signed by the Chair. The website address where the report is published must be included in the scheme return and the annual report. A statement that the TCFD report is available on a website (along with the website address and how to find and read the information) must appear in the annual benefit statement and the annual funding statement (for DB schemes). Trustees should consider how to make the report accessible to those with disabilities and DWP guidance is helpful here.

TPR’s guidance should be read alongside:

• DWP statutory guidance on governance and reporting of climate change risk;
• Pensions Climate Risk Industry Group guidance on climate change, governance and TCFD disclosures;
• The TCFD website, including the Knowledge Hub;
• TPR’s new proposed code of practice – you can view Gowling WLG’s one-page overview on this here.

TPR’s draft appendix on breaches of the climate change governance and reporting regulations

Mandatory penalties

Where trustees fail to publish the TCFD report in line with the above requirements on timing and accessibility, TPR must issue a mandatory fine of a minimum of £2,500. The maximum mandatory penalty is £5,000 for individuals or £50,000 in any other case (e.g. companies). Trustees are jointly and severally liable for the penalty.

TPR states that its general approach is that:

• any consecutive mandatory penalty will normally be at least £5,000 to reflect the seriousness of a repeated or ongoing breach.
• schemes with professional trustees are likely to receive a £5,000 minimum penalty due to the higher standards expected from such trustees.
• in applying a higher penalty than the minimum, TPR will take into account the same factors that it considers when it sets the level of a discretionary penalty in other cases, including:
• the impact of the breach on affected members and the significance of any detriment suffered;
• whether a higher penalty might effect a behaviour change;
• the reasons for the failure (e.g. higher fines where the failure to publish is based on a failure to comply with underlying governance requirements);
• extenuating circumstances are considered on a case-by-case basis.

Discretionary penalties and other enforcement options

Alongside the mandatory regime for a failure to publish in line with requirements, TPR also has the power to issue discretionary penalties or take other enforcement action such as investigation and exercising other powers where there is an underlying breach of the governance and reporting requirements. Again, TPR will follow its usual monetary penalties policy in setting a discretionary penalty and these will be issued on a joint and several liability basis. Dovetailing with this approach, TPR has confirmed that for the “as far as they are able” obligations, it will consider the trustees’ actions as a whole.

Generally, the amount of the monetary penalty will depend on the persons concerned, the band level and any aggravating or mitigating factors. The guidance sets out some examples: a failure to make an individual disclosure in an otherwise comprehensive TCFD report might trigger band levels 1 or 2 penalties, depending on the facts and the impact of the failure. A failure to carry out underlying governance activities will likely trigger band levels 2 or 3 and multiple breaches will be treated more seriously, e.g. band level 3.

What does this mean for trustees?

As the UK economy gradually becomes accountable to TCFD-inspired requirements, trustees should ensure they have a plan of action ready. Crucially, trustees must collaborate with their service providers (particularly investment managers) to ensure that climate-related risks and opportunities are being considered and factored into decision-making as early as possible. Even if information is unavailable, TPR expects trustees to show their efforts in obtaining such data and their engagement with service providers.

Trustees of DB schemes will need to consider additional factors, e.g. the climate-related risks to scheme funding and covenant when examining their risk management monitoring framework and they should discuss these risks with the scheme employer.

Significant emphasis is placed on trustees showing that they are actively considering climate-related risks and opportunities. Trustees are not expected to ‘solve’ climate change; they are expected to engage with the reality of the climate emergency and make sure that their scheme is adequately protected from its risks and actively exploring its opportunities.

TPR is living up to its climate change strategy commitment to publish guidance to support trustees – you can read our article on the strategy here. TPR promises further guidance on how trustees and their advisers can consider climate-related risks and opportunities through assessment of covenant, demonstrating that this is truly a collaborative effort.

Relevant links

• Check out our blog post on the Pension Schemes Act 2021 and climate risk reporting: https://loupedin.blog/2021/01/pension-schemes-act-2021-and-climate-risk-reporting/

• Check out our blog post on TPR’s climate change strategy: https://loupedin.blog/2021/04/tpr-releases-climate-change-strategy/