UK pensions: The journey to net zero
At COP26’s Finance Day, the Chancellor of the Exchequer announced plans for the UK to become the first ever ‘Net Zero Aligned Financial Centre’.
Under the proposals, UK financial institutions and listed companies will be required to publish net zero transition plans detailing how they will adapt and de-carbonise by 2023, as the UK moves towards a net zero economy by 2050.
The requirement to prepare transition plans is to be backed by legislation, and oversight arrangements are to be established to ensure that transition plans are a genuine endeavour.
“This means we are going to move towards making it mandatory for firms to publish a clear, deliverable plan setting out how they will decarbonise and transition to Net Zero – with an independent Taskforce to define what’s required.” Rishi Sunak, Chancellor of the Exchequer
FCA-regulated pension providers
Pension providers regulated by the Financial Conduct Authority (FCA) fall within the scope of this announcement.
This latest announcement highlights that climate change governance and the Taskforce on Climate-related Financial Disclosure (TCFD) requirements placed on private sector entities are not static and UK government expectations of the private sector are very high, and likely to remain so.
The FCA is currently considering responses to a recent consultation on introducing TCFD-aligned disclosure requirements for regulated entities, including pension providers. A key aim of this consultation is for the disclosures to meet the needs of pension savers.
Alongside this consultation, the FCA consulted on proposals to extend the application of its TCFD-aligned Listing Rule for premium-listed commercial companies to issuers of standard listed equity shares.
The FCA intends to confirm its final policy on climate-related disclosures before the end of 2021.
Occupational pension schemes
For trust-based pension schemes, the largest private sector occupational schemes and all master trusts must comply with TCFD-aligned disclosure requirements from October 2021. Pension schemes must also introduce climate change-related governance arrangements alongside the disclosure requirements.
In October 2021, the Department of Work and Pensions (DWP) brought forward proposals on enhancing TCFD-aligned disclosures by pension schemes to require trustees to measure – as far as they are able – and report on their investment portfolios’ Paris alignment.
This will involve calculating and disclosing a portfolio alignment metric describing the extent to which scheme investments are aligned with the goal of limiting the increase in the global average temperature to 1.5 degrees Celsius above pre-industrial levels.
When introduced these enhanced reporting requirements will apply to the largest schemes and master trusts in the first instance.
Oversight of FCA-regulated financial institutions
The UK government is to set up a high-level Transition Plan Taskforce, bringing together industry and academia with regulators and the third sector to develop a ‘gold standard’ for transition plans and associated cutting edge metrics, coordinating with international efforts under the Glasgow Financial Alliance for Net Zero (GFANZ) and others, and reporting by the end of 2022.
The Taskforce will set a robust standard and help to tackle greenwashing. E3G and the Centre for Greening Finance and Investment (CGFI) will act as the secretariat, with funding provided by philanthropy. The FCA will be formally involved and will be required to have regard to its findings.
Oversight of TPR-regulated pension schemes
The Pensions Regulator (TPR) has published draft guidance on how it intends to ensure that pension schemes have complied with their climate change governance and reporting obligations.
It will be looking for evidence that pension trustees:
- Are taking proper account of climate change when making decisions about their scheme, and that those advising trustees are helping them to do this.
- Have carried out an analysis in a way that is consistent with TCFD recommendations so that savers and others can be confident in it.
- Have seriously considered the risks and opportunities that climate change will bring to the scheme, in its particular circumstances.
- Have decided what to do as a result of this analysis and have set a target to help the scheme achieve that goal.
A ‘whole’ investment chain approach
There will undoubtedly be significant challenges along the way for pension schemes and pension providers as they pivot to focus keenly on climate change governance, risk and disclosure. Having similar requirements to other entities in the investment chain will help improve the quality and consitency of data available to pension schemes and pension providers over time.
While the largest pension schemes already have governance and disclosure obligations, we know these requirements are to be extended in short order to a second tranche of pension schemes with the likelihood that other schemes will be caught at a later date.
Pension schemes as yet outside the scope of the governance and disclosure requirements should still be considering climate change as part of their integrated risk management. Trustees of smaller schemes should also be considering their training needs and how to get up to date on their trustee knowledge and understanding (TKU).
Other challenges for smaller schemes are more limited access to advisers and, possibly, to good quality data, depending on the nature of the investments they hold. However, asset managers are at the forefront of seeking ways of obtaining data and assessing the exposure of investments, including pooled investments, to climate-related risk which smaller schemes may be able to benefit from.
The Pensions and Lifetime Savings Association is also there to support pension schemes and providers to address some of the challenges outlined and has recently published A changing climate report: Progress update.