The DWP has tabled amendments to the Pension Schemes Bill, which is currently going through Parliament, which would enable it to add to the governance and disclosure requirements for occupational pension schemes in relation to climate change risk.
The proposed amendments would give the Secretary of State very broad regulation making powers to, amongst other things, require trustees to:
- set a strategy for managing their scheme’s exposure to climate risks
- set targets relating to their scheme’s exposure to climate risk
- measure performance against those targets, and
- prepare documents and publish prescribed information relating to the effects of climate change on the scheme.
The amendments also envisage the Pensions Regulator having the power to issue compliance notices on, and ultimately being able to fine, trustees and third parties (such as asset managers) who fail to comply with the new requirements. The DWP would also have the power to issue guidance which trustees would have to have regard to.
Any new requirements relating to climate change that are introduced would be on top of those introduced on 1 October last year, which require trustees to set out their policy on how they take account of financially material factors, including environmental, social and governance factors (including climate change) in their investment decision making. Money purchase schemes with more than 100 members are also required to produce and publish their first statement on how they have implemented this policy from 1 October this year.
Separate industry guidance on climate related financial disclosures for pension funds, which Guy Opperman has described as “game-changing”, is also due to be published for consultation in March.
These amendments are consistent with the DWP’s increasing focus on climate change, driven by Guy Opperman who has made clear that he is “underwhelmed by the lack of action and urgency on this vital issue”, particularly among asset managers, and signalled that it is time to graduate from talking the talk to walking the walk. They also signal a step change in the DWP’s approach to tackling climate risk and demonstrate its clear focus on ensuring that occupational pension schemes are taking climate risk seriously.
However, the breadth of the regulation making powers is causing some concern. In particular, there is concern that the new requirements could unduly interfere with trustees’ investment decision making powers – whether or not they do will depend on how prescriptive any new requirements and the related guidance are.
The amendments only cover occupational pension schemes. However, we would expect the FCA to mirror any new requirements in their rules for providers of workplace personal pension schemes and IGCs to ensure that a level playing field is maintained and that members enjoy equal levels of protection against climate risks regardless of which regulatory regime their scheme falls into.
You can view the proposed amendments here (see new sections 41A-C Pensions Act 1995, starting on page 4).