Proposed guidance for pension schemes on climate change governance and reporting
The DWP has consulted further on its plans for pensions schemes to implement climate governance and reporting requirements.
Draft regulations and proposed statutory guidance follow a consultation by the Department for Work and Pensions (DWP), in 2020, on its policy on climate change governance and reporting by pensions schemes. New regulations are to be issued under the Pensions Schemes Act 2021 and are likely to be effective from October this year.
ICAS responded to the policy consultation and the ICAS Pensions Panel submitted a response to this latest consultation on the legal underpinnings needed to implement the policy.
Pension scheme climate governance and reporting requirements are not being introduced in isolation and are part of wider plans that will see key entities in the investment chain, including listed companies, prepare climate change reports. The UK Government, jointly with The Pensions Regulator (TPR) and the Financial Conduct Authority (FCA), published an interim roadmap to implement the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD).
Under the proposals, occupational defined benefit (DB) and defined contribution (DC) pension schemes with assets of over £1 billion, all master trusts and all authorised schemes offering collective money purchase benefits will be required to comply with the new requirements.
The proposed statutory guidance, supported by draft regulations cover the following key topics:
- Scope and timing
- Trustee knowledge and understanding, and governance
- Strategy and risk management
- Scenario analysis, metrics and targets
Scope and timing
The new requirements are expected to apply to occupational pension schemes with assets of over £5 billion from October 2021, with the requirements expected to apply to occupational pensions schemes with assets of over £1 billion but less than £5 billion from October 2022.
Bulk and individual annuity contracts are carved out of the assets threshold for determining if and when the requirements apply to occupational pension schemes.
In our consultation response, we recommend that the statutory guidance explains more clearly how all the reporting requirements which comprise the TCFD (climate change) report are expected to relate to the period of the scheme’s annual report.
We also expressed our continuing reservations about the tight timescales for the implementation of the governance and TCFD reporting requirements.
Trustee knowledge and understanding, and governance
Trustees will be required to have an appropriate degree of knowledge and understanding of the principles relating to the identification, assessment and management of climate change risks and opportunities.
We have concerns that there may be insufficient time for trustees, particularly lay trustees, to acquire the requisite knowledge and understanding in timescale for complying with the governance requirements.
We recommend that the DWP works with TPR and the industry to ensure that the trustees have access to training material and other resources they may need to meet the trustee knowledge and understanding requirements to a meaningful extent.
These challenges will include the upskilling of scheme employees and challenges for advisers in upskilling so that they are in a position to sign up to revised agreements with their clients.
Strategy and risk management
New regulations will set out those factors trustees must consider in setting the time horizons schemes will report against in their TCFD report.
Climate risk management arrangements are to form part of a scheme’s integrated risk management arrangements. It is therefore important that trustees are able to allocate sufficient time and resources to addressing particular risks, across all categories of risk, in a manner commensurate with the scheme’s exposure to those risks.
Scenario analysis, metrics and targets
While we recognise that data quality is improving, we believe that pension schemes are likely to have difficulties in obtaining data of sufficient quality to be able to undertake meaningful scenario analysis within the timescales for complying with the TCFD reporting requirements. We have similar concerns about the preparation of metrics and the reporting of performance against targets.
The value of TCFD reports to the public will rest on data quality and therefore the quality of data in the investment chain is likely to have an impact on trust in TCFD reports. If public expectations about TCFD reporting by pension schemes are not met, this could have a detrimental impact on trust.
Pension schemes are required to make their TCFD reports available to the public by publishing these on a website.
TCFD reports will be cross-referred to in the annual reports of pension schemes but will not form part of the annual report.
Click here find out more about this consultation and the views of the Pensions Panel.