Guidance on pension scheme TCFD governance and reporting requirements
New Pensions Research Accountants Group (PRAG) guidance has been issued to assist preparers of pension scheme annual reports to understand Task Force on Climate-related Financial Disclosures (TCFD) reporting requirements.
The guidance provides pension scheme annual-report preparers and pension trustees with an overview of the requirements for pension schemes to implement climate-change governance arrangements and to prepare an adapted TCFD report.
Four key elements
There are four key elements to climate-change governance and reporting by pension schemes:
- Governance. Trustees must establish and maintain oversight of the climate-related risks and opportunities which are relevant to their scheme.
- Strategy. Trustees must, on an ongoing basis, identify and assess climate-related risks and opportunities which they consider will have an effect over the short term, medium term and long term on the scheme’s investment strategy and, for Defined Benefit (DB) schemes, the scheme’s funding strategy.
- Risk management. Trustees must establish and maintain processes for the purpose of enabling them to identify, assess and manage climate-related risks which are relevant to their scheme. The trustees’ management of climate-related risks must be integrated into their overall risk-management of the scheme.
- Metric and targets. Trustees must select, as a minimum, one metric which gives the total greenhouse-gas emissions of the scheme’s assets; one metric which gives the total carbon-dioxide emissions per unit of currency invested by the scheme and one further climate change metric. Trustees must set a target for their scheme in relation to at least one of the metrics which they have selected to calculate.
As part of their strategy, trustees must, as far as they are able, undertake scenario analysis in at least two scenarios where there is an increase in the global average temperature. In one of those scenarios, the global average temperature increase selected by the trustees must be within the range of 1.5 and 2 degrees Celsius above pre-industrial levels.
Climate-change scenarios can help trustees and the sponsoring employer determine how exposed the pension scheme may be to climate change. The trustees and the employer can then use the results of the analysis to identify steps to mitigate the risks.
Schemes in scope
DB and Defined Contribution (DC) private sector schemes, which have relevant assets of £5bn or more on the first scheme year-end date to fall on or after 1 March 2020, must meet the climate-change governance requirements for the current scheme year from 1 October 2021 to the end of that scheme year (unless audited accounts have not been obtained for that scheme year, in which case from the date they are obtained).
Trustees must also publish a TCFD report within seven months of the end of the scheme year which is underway on 1 October 2021 (unless scheme-relevant assets are zero on the scheme year-end date).
Relevant assets (except in the case of earmarked schemes) are the net assets of the scheme, excluding bulk and individual annuity policies.
For schemes which are authorised master trusts on or after 1 October 2021, trustees must meet the climate-change governance requirements for the scheme year which is underway to the end of that scheme year and produce a TCFD report within seven months of the end of that scheme year.
These requirements will apply to authorised Collective Defined Contribution (CDC) schemes. CDC schemes are collective money purchase schemes which can be established under the Pension Schemes Act 2021 from 1 August 2022.
Schemes with relevant assets of more than £1bn but less than £5bn have an additional twelve months to comply with the climate-change governance and reporting requirements.
Trustees must include a link to the TCFD report in their scheme’s annual report and financial statements produced for that scheme year.
Schemes not in scope
DB and DC schemes, in the private sector, with relevant assets of less than £1bn are outside the scope of current legislation but can adopt the governance and reporting requirements on a voluntary basis. Smaller schemes are not expected to remain out of scope so the PRAG guidance should be of interest to the trustees of any scheme seeking to stay up to date.
DWP plan for an additional metric
The Department of Work and Pensions has recently consulted on proposals to require trustees to calculate and report a metric setting out the extent to which their scheme’s investments are aligned with the Paris Agreement goal of limiting the global average temperature increase to 1.5 degrees Celsius above pre-industrial levels.
All trustees who are subject to the climate-change governance and reporting regulations are expected to have to produce the new metric from 1 October 2022. There is no plan for a phased roll-out of this metric.
The consultation closed in January 2022 and the consultation outcome is awaited.
More about the PRAG guidance
The guidance was prepared on behalf of PRAG by its ESG Working Party and is available to PRAG members on the PRAG website.
The PRAG guidance signposts related guidance published by The Pensions Regulator (TPR) on Governance and reporting of climate-related risks and opportunities.
TPR’s guidance supports Governance and reporting of climate change risk: guidance for trustees of occupational schemes issued by the DWP. The DWP guidance is statutory.