Pensions Regulator seeks improved climate scenario analysis from trustees

Reports from the Institute and Faculty of Actuaries (23 pages / 9.87MB PDF) and Carbon Tracker, an independent financial think tank focused on climate change, questioned the credibility of scenario models and analysis used by trustees. The research suggests that some outcomes may significantly underestimate the financial risks posed by climate change, contradicting established scientific findings.

In addition, a review of Task Force on Climate-related Financial Disclosures (TCFD) reports revealed that the overall analysis of climate scenarios needed improvement. Unlike longevity and asset-liability models, climate change models have a wide range of potential outcomes, making predictions difficult.

The Pensions Regulator’s climate and sustainability lead, Mark Hill, told trustees and their advisers to carefully evaluate the narratives associated with their climate scenarios and the outcomes they produce. Writing on The Pensions Regulator website, Hill said trustees should challenge their advisers and the outputs of climate scenario analysis and should assess whether the financial analysis aligns with scientific consensus – and consider how non-linear changes and tipping points are factored in.

He added that, while TCFD reporting provides a framework for disclosure, it alone cannot address the systemic risks posed by climate change. Trustees must focus on informed decision-making and accelerated action on risk management, and explore investment opportunities as part of effective transition planning.

Hill acknowledged that data, analytics, and modelling have limitations, but said the usefulness of outputs would improve as the pensions industry develops its knowledge and understanding. He emphasised that trustees are not expected to be climate experts, but that they should have a basic understanding of climate issues, undergo regular training, and consider additional advisers or specialists if needed.

Trustees are expected to periodically review their scenario analysis, even in years when it is not formally required. Triggers for new analysis include the availability of improved scenarios or modelling capabilities or changes in industry practice. If new analysis is not undertaken, trustees should explain why in their TCFD report, Hill said.