Pension scheme trustees urged to act now on climate reporting

Mandatory climate governance, strategy and risk management requirements will come into force for the largest occupational schemes and authorised master trusts 1 October 2021, the UK government has confirmed. It is now consulting until 10 March 2021 on the draft regulations and statutory guidance that will implement and underpin the new requirements.

The government has also published non-statutory guidance, developed by the cross-government and industry Pensions Climate Risk Industry Group (PCRIG), to assist trustees with assessing, managing and reporting climate-related risks in line with the recommendations of the international Taskforce on Climate-Related Financial Disclosures (TCFD).

The new regime will initially apply to occupational pension schemes with more than £5 billion in assets, authorised master trusts and collective money purchase schemes. It will be extended to schemes with more than £1bn in assets from October 2022.

Pensions expert Carolyn Saunders of Pinsent Masons, the law firm behind Out-Law, said that schemes of all sizes should make themselves aware of the new regime.

"Appropriate governance around climate risks and opportunities is key to enabling trustees to comply and demonstrate compliance with their fiduciary duties in this complex and rapidly-changing area," she said. "The expectation is that schemes initially within scope of these regulations will drive best practice in the market for the benefit of all."

"Anyone familiar with the DWP's earlier consultation on the principles underlying this regime will find few surprises in this new consultation, which is as it should be. Schemes in the first cohort caught by the regulations have only a matter of months now to sort out the governance framework needed to support TCFD disclosures. But all schemes, whatever their size, should have regard to this regime," she said.

Saunders pointed out that many of the UK's largest schemes were already taking action in this area, and are "keen to play their part in the UK's response to the climate emergency". This week, some of the UK's largest pension schemes wrote to the government calling for tougher action on climate change, she said.

Pension scheme trustees are currently required to disclose how they take account of climate change and other environmental, social and governance (ESG) factors to the extent that these may have a material impact on scheme members' benefits. The new regime goes much further on climate change reporting, requiring schemes to assess the impact of climate change on their investments in line with TCFD recommendations, and to publicly report on that information.

The draft regulations apply to all authorised master trusts and collective money purchase schemes, and all occupational pension schemes with assets of £1bn or more. Authorised master trusts, collective money purchase schemes and occupational pension schemes with assets of £5bn or more must comply from October 2021, and occupational pension schemes with assets of £1bn or more must comply from October 2022.

The government has simplified some of the requirements following feedback to its August 2020 consultation. Schemes will be given a full seven calendar months from the scheme year end date to prepare and publish their TCFD report. Scenario analysis has been reduced from an annual requirement to once every three years, although trustees must review their scenario analysis annually to ensure it remains fit for purpose. Performance against targets should be monitored annually rather than quarterly, with targets reviewed for suitability annually.

The government originally intended to review the regime with a view to extending it to smaller schemes in 2024. It now intends to carry out this review in 2023, with the possibility of bringing smaller schemes in scope by the following year.

In a speech to the Professional Pensions Investment Conference, pensions minister Guy Opperman described the proposals as "world leading".

"The UK is set to become the first major economy to require climate risks to be specifically considered and then reported on by pension schemes," he said.

"Climate change is a major systemic financial risk and threat to the long-term sustainability of private pensions. With £2 trillion in assets under management, all occupational pension schemes are exposed to climate-related risks," he said.

Pinsent Masons has prepared a guide for pension trustees on climate risk reporting, available below.

TCFD Climate Risk Reporting for Trustees (20-page / 3.25MB PDF)