ICAS responds to DWP climate governance and reporting proposals for pension schemes
ICAS has responded to UK government proposals for climate governance and reporting by occupational defined benefit and defined contribution pension schemes, including master trusts.
In our response prepared jointly by the ICAS Pensions and Sustainability Panels, we broadly welcome proposals from the Department of Work and Pensions (DWP) set out in its consultation paper Taking action on climate risk: improving governance and reporting by occupational pension schemes.
Under the proposals, occupational defined benefit (DB) and defined contribution (DC) pension schemes with assets of over £5 billion, all master trusts and all authorised schemes offering collective money purchase benefits will be required to establish specific governance arrangements to manage climate-related risks and to produce Task Force on Climate-related Financial Disclosures (TCFD).
DB and DC schemes with assets over £1 billion will also be required to comply with the proposals but are expected to have longer to do so.
These detailed and wide-ranging proposals are to be set out in regulations under the Pension Schemes Bill currently progressing through the UK parliament and in accompanying statutory guidance.
Governance arrangements
Pensions schemes caught by the new regulations will be required to adopt and maintain oversight of climate risks and opportunities; and establish and maintain processes by which trustees satisfy themselves that scheme managers are assessing and managing climate-related risks and opportunities.
Trustees will also be required to describe their role in ensuring oversight of climate-related risks and opportunities; and the role of scheme managers in assessing and managing climate-related risks and opportunities.
Reporting requirements
These are extensive with perhaps the most challenging proposals being the following:
- Scenario analysis. To assess and report on the resilience of scheme assets, liabilities and investment strategy and, in the case of DB schemes, funding strategy, as far as possible, in at least two climate-related scenarios, one of which must be a 2°C or lower scenario.
- Metrics. To select and report on at least one greenhouse gas emissions-based metric and at least one non-emissions-based metric to assess the scheme’s assets against climate-related risks and opportunities.
- Targets. To set and report on at least one target to manage climate-related risks for one of the metrics chosen to calculate, and to disclose those targets(s).
Delivering the reporting requirements in full will require a lot of data and there are likely to be significant gaps. Therefore, schemes will be able to take a ‘comply or explain’ approach to aspects of their TCFD report.
Schemes will be required to make their TCFD reports publicly available via a website and to include a link to the report within their annual report.
Timing
The proposed timing for implementation of the governance arrangements by DB and DC schemes with assets of over £5 billion, master trusts and collective money purchase schemes is 1 October 2021, with DB and DC schemes with assets over £1 billion applying these from 1 October 2022.
The reporting requirements are currently expected to apply to DB and DC schemes with assets of over £5 billion, master trusts and collective money purchase schemes for years ending on or after 1 June 2020, with DB and DC schemes with assets over £1 billion applying the reporting requirements to scheme years ending on or after 1 June 2021.
In our response, we recommend revisiting the implementation timetable so that schemes first apply the reporting requirements in the first full scheme year that the governance arrangements are in place.
More about our response
ICAS supports the UK government’s Green Finance Strategy and recognises that the proposed climate governance and TCFD reporting requirements for pension schemes are part of a wider strategy to green the economy while managing climate change risk more effectively.
In 2017, ICAS was a signatory to a Statement of Support for the TCFD recommendations, along with other leading accountancy bodies, in recognition that these provide a framework for the disclosure of climate-related risks and opportunities within mainstream reporting.
Behavioural change is needed to achieve these goals so that markets behave in a different way. For pension schemes to address climate risk within their investment portfolios, it is vital that new climate governance arrangements and reporting requirements are outcome focused.
To achieve an approach by pension schemes which is genuinely outcome focused, we recommend that the timetable for implementing the proposals is revisited to enable pension schemes to have in place climate governance arrangements for an entire scheme year (i.e. reporting period/ financial year) prior to preparing their first TCFD report.
As the proposals stand, schemes will be required to place a link within their annual report, including the financial statements, to an initial TCFD report which does not relate to the reporting period of the annual report. We believe that the period covered by the TCFD report, including reporting on any metrics and targets, would be best aligned with the scheme year.
By revisiting the timetable, the industry would be given the opportunity to further address the significant knowledge gap we believe exists in relation to climate governance and reporting and to improve the quality of the data available to prepare TCFD reports.
We appreciate that this is a journey and we would not expect implementation of the proposals to be delayed until all the requirements can be met in full. Therefore, we welcome the comply or explain approach set out in the consultation paper.
As part of a post-implementation review of the proposals, we would welcome a broader review of the investment reporting requirements placed on pension schemes with a view to taking a more integrated approach to these.
In addition, we recommend that in the interests of transparency, that pension scheme annual reports, at least of the largest schemes, are published in future.
The proposed timetable for introducing the new reporting requirements is very tight, therefore, pension schemes and their advisers should be planning ahead in advance of the new regulations and statutory guidance being finalised.