Pensions and Climate change: the Pensions Regulator’s draft guidance

The Pensions Regulator (tPR) has published a consultation introducing its proposed guidance (‘Draft Guidance’) on pensions climate risk.

The Draft Guidance follows on from the introduction of the Occupational Pension Schemes (Climate Change Governance and Reporting) Regulations 2021 (‘Regulations’).The Regulations impose requirements on trustees or managers of large occupational pension schemes – those with more than £1bn in assets - to establish and maintain oversight of the climate-related risks and opportunities which are relevant to their scheme.

Schemes will be required to have regard to statutory guidance issued by DWP when complying with the Regulations. The DWP consultation on this statutory guidance has prompted tPR to produce its own, covering  both its monetary penalties policy (as applied to non-compliance with the Regulations) and on the steps tPR expects schemes to take and report on in their annual climate change report (or their TCFD report, as it is commonly known).

The Regulations and DWP guidance only apply to large schemes. However, tPR suggests that trustees who are not subject to the legislation may wish to follow the Draft Guidance. Given broader obligations around inclusion of financially material considerations (which includes environmental matters) within a scheme’s statement of investment principles and given requirements on the horizon regarding scheme risk assessments and effective systems of governance, it is likely that consideration of risks and opportunities associated with climate change are likely to feed through to occupational pension schemes more generally.

Key aspects of tPR's Draft Guidance on climate-related risks and opportunities?

The Draft Guidance sets out what tPR is looking for in order to decide whether a scheme is compliant with the Regulations and the DWP’s guidance. tPR expects to see evidence that trustees:

• Are taking proper account of climate change when making decisions about the scheme and that advisers are helping trustees to do this.
• Have carried out their analysis consistently with the Taskforce on Climate-related Financial Disclosures (the TCFD).
• Have seriously considered the risks and opportunities that climate change has for the scheme.
• Have decided what to do as a result of this analysis and have set a target to help achieve that goal.

The Draft Guidance sets out example steps to be taking which include:

• Ensuring that climate-related risks and opportunities are within the remit of an appropriate sub-committee.
• Building climate change into service provider and adviser contracts to ensure that service providers and advisers report on climate-related risks and opportunities
• Identifying short, medium and long-term time periods for the scheme and allow for regular review
• Identify how the scheme will develop over those time-periods
• Integrating climate change into regular scheme activities
• Speaking to the scheme’s employer to understand how climate-related risks and opportunities affect the employer’s covenant
• Conducting scenario analyses
• Obtaining specialist advice, particularly in relation to investments
• Documenting the steps and advice taken including the metrics calculated, targets set and their review

tPR monetary penalties policy

tPR will have the power to take enforcement action against schemes which do not comply with the Regulations. Enforcement action would start with a compliance notice, including third-party compliance notices. Where a scheme continues to be non-compliant, tPR  may impose a fine.

The potential amount of such a fine is in line with the typical statutory amounts: up to £5,000 if the person is an individual or £50,000 if the person is a corporate body, a Scottish partnership or any other person. Fines levied for non-publication of a TCFD report online will not be less than £2,500 and tPR has indicated that fines for such a failure will be mandatory.

The draft monetary penalties policy acknowledges that all the information trustees need may not be available immediately.  In this scenario, tPR has said that it will expect trustees to provide an explanation of the efforts they have taken to obtain the climate-related data and an explanation of the gaps. tPR will also expect trustees to summarise their plans for completing those gaps in the future so that the quantity and quality of data is improved.

Actions which schemes should be taking

With effect from 1 October 2021, trustees of schemes which have assets over £5 billion, trustees of all authorised master trusts and trustees of all authorised collective money purchase schemes must comply with the Regulations.

With effect from 1 October 2022, trustees of schemes which have assets over £1 billion will be required to comply with the Regulations.

Pension schemes and their advisers should begin to familiarise themselves with the DWP guidance as the legislation requires trustees and managers to have regard to that guidance when reporting in line with the legislation on climate-related financial disclosures. Trustees should also familiarise themselves with the Pensions Climate Risk Industry Group guidance.

The obligation on trustees is to establish a process to satisfy themselves that any person undertaking scheme governance activities takes adequate steps to identify, assess and manage climate-related risk. The first step therefore will be to identify which advisers/ professionals undertake scheme governance activity. The list is likely to include: investment consultants, the scheme actuary, covenant advisers, fiduciary managers, anyone exercising voting rights associated with a scheme’s investments.

Trustees should be mindful of the fact that the Regulations are not defined solely by reference to investment activity but to overall oversight of climate-related risks and opportunities.  The likelihood is that many such risks and opportunities will be centred on the scheme’s investments, but this is not exclusively the case. Trustees should also consider how their obligations under these Regulations link in with their policy on financially material considerations within their statement of investment principles which is likely to include climate change.

For more information please contact Suzanne Burrell or your usual Shoosmiths contact.

A version of this article was first published by LexisNexis UK.