Last month, the Department for Work and Pensions (DWP) published a consultation on pension scheme governance and reporting on climate change (the Consultation), which runs until 7th October 2020. The Consultation follows on from the Pensions Climate Risk Industry Group consultation in March 2020 on applying recommendations from the Task Force on Climate-related Financial Disclosures (TCFD) and proposes several mandatory governance and reporting requirements which would initially apply to trustees of larger occupational pension schemes, authorised master trusts and authorised collective money purchase schemes.

Climate change: impact on pension schemes

Climate change is not a new issue for trustees. Consideration of the risks and opportunities associated with climate change falls within trustees' fiduciary duty to consider all financially material risks and the consideration by trustees of climate change when preparing their Statement of Investment Principles is already a legislative requirement. With the DWP proposals, the Government are now seeking to go a step further, setting out requirements to ensure analysis and consideration of climate change is 'embedded in the decision-making process of trustees'.

The DWP proposals

In line with the TCFD recommendations, the DWP proposes amendments to the Pension Schemes Bill during its passage through the House of Lords with regulations being consulted upon later this year or in early 2021 (our latest update on progress with the Pension Schemes Bill is available here). The proposed regulations would introduce mandatory requirements for trustees to have "effective governance, strategy, risk management and accompanying metrics and targets for the assessment and management of climate risks and opportunities". 

The proposed regulations would, in summary, require trustees to:

  • establish and maintain oversight of climate-related risks and opportunities;
  • identify and assess the impact of climate related risks and opportunities on the scheme's investment and funding strategy;
  • at least annually, conduct scenario analysis to assess the resilience of the scheme's assets, liabilities and investment strategy;
  • adopt and maintain processes for identifying, assessing and managing climate-related risks, which must be integrated into the scheme's overall risk management strategy;
  • calculate metrics to assess the scheme assets against climate-related risks and opportunities; and
  • set targets to manage climate related risks for one of the calculated metrics and measure 'as far as trustees are able' performance against the target.

The proposals would initially affect those schemes with £5 billion or more in net assets, before being extended to schemes with £1 billion or more in net assets by the end of 2023. The application of the proposals to smaller schemes would be revisited in 2024.

Disclosure and Penalties

The proposals would require trustees to publish an annual report setting out how they have complied with the TCFD recommendations within seven months of the end of the scheme year. In addition, trustees would be required to report compliance to the Pensions Regulator through the annual scheme return and inform scheme beneficiaries of the availability of this information via annual benefit statements.

The proposals include a mandatory penalty of at least £2,500 where trustees have failed to publish a report and other penalties would be imposed at the Pensions Regulator's discretion with the maximum penalty for breach of any of the requirements being £5,000 for an individual trustee or £50,000 for a corporate trustee. Failure to reference the report in the scheme return and in annual benefit statements would be subject to the existing disclosure of information penalty regime.

Practical Implications

It is important that trustees monitor developments in this area and ensure that they comply with the current regulatory requirements and any regulations which come into effect following the Consultation. Whether or not trustees have started to consider the impact of climate change on their scheme, it seems clear that trustees will increasingly need to consider the risks and opportunities of climate change and be prepared to report on how they have complied with the TCFD recommendations if the DWP's proposals become law. We will provide an update on the outcome of the Consultation when this is available.

If you would like to discuss anything raised in this blog, please get in touch with your usual contact at Brodies.