UK Pensions Regulator incorporates climate change into fines policy

The new policy requires trustees to introduce measures that identify and manage climate-related risks and opportunities and to publish reports about the steps they have taken to mitigate them.

Failure to publish such reports will result in a financial penalty.

The minimum penalty is £2,500 - or £5,000 for schemes with a professional trustee in place - while the maximum is £5,000 for individual trustees, or £50,000 in other cases.

The Pensions Regulator said that several factors including the number of members affected, and the significance of any detriment suffered, would be considered when deciding on the size of a penalty.

Pension trustees can also face discretionary penalties for underlying governance breaches as well as wider breaches of the new climate change requirements.  

The Pensions Regulator said it hopes the new policy will help strike a consistent approach to action and disclosure across four core areas: governance, strategy, risk management, and targets.

Hayley Goldstone, pensions expert at Pinsent Masons, said: “Unlike the mandatory fine for failure to prepare a chair’s statement, the mandatory penalty for failing to publish the report doesn’t relate to the content of the report. This may come as a relief to schemes who had to grapple with the regulator’s expectations for the content of the chair’s statement when they were first introduced,” she said.

“The Pensions Regulator is keen to point out that its role in respect of the new climate change requirements is not limited to mandatory or discretionary fines. It may also consider taking other regulatory action, which could include further investigation or exercising other powers – which may also result in further penalties,” she added.

Goldstone said: “The Pensions Regulator has acquired new enforcement powers this year, including broad information-gathering powers, and failure to publish a climate risk report on time is one way schemes could catch the interest of the Regulator and find themselves subject to a wider investigation.”

“The regulations require trustees to take certain steps, such as scenario analysis, ‘as far as they are able’ – which recognises that there may be gaps in available data or other limitations on what trustees can do to assess climate risks and opportunities, particularly as the new requirements bed down,” she added.

“The Pensions Regulator helpfully outlines its expectations of trustees who encounter problems of this sort – from fully describing the compliance steps they have taken, the obstacles and the impact of those obstacles and how they plan to overcome them in future. As with many areas of scheme governance where the regulator may look to hold trustees to account, following a careful process and fully documenting it at each stage will be vital,” she said.