The DWP has confirmed its plans to introduce new requirements relating to the management and disclosure of climate-related risks for the largest UK pension schemes. The proposed plans were broadly supported by the industry. However, the DWP made some changes in light of the consultation responses it received. Most notably, adjusting the deadline for schemes to publish the new climate-related disclosures and reducing the frequency with which schemes need to monitor their performance against their chosen metrics and targets and to undertake scenario analysis.
The DWP’s response, which is accompanied by draft implementing regulations and industry guidance, will be welcomed by the industry, particularly the largest schemes (which will be the first schemes to be subject to these requirements) who now have greater clarity of what will be expected of them. The response further demonstrates the Government’s commitment to urgently address climate-related risk in the context of pensions and to ensure pension schemes play their role in the energy transition.
Trustees of in scope schemes should start preparing now by reviewing their scheme’s approach to addressing climate-related risks and determining the steps they will need to take to comply with these new requirements, which will apply to the largest schemes from 1 October 2021.
In September 2020, the DWP launched a consultation seeking views on proposals to require trustees of large occupational pension schemes, authorised master trusts and schemes offering collective money purchase benefits to have an effective system of governance, monitoring and risk management relating to climate-related risks and opportunities in place from 1 October 2021.
The DWP also sought views on whether in scope schemes should be required to report in line with the Task Force on Climate-related Financial Disclosures (TCFD) 11 recommendations, by the end of 2022.
Based on the proposals, where these new requirements apply, trustees would be required to:
- establish, and maintain on an ongoing basis, oversight of climate-related risks and opportunities, and satisfy themselves that persons managing the scheme are assessing and managing climate-related risks and opportunities
- identify, on an ongoing basis, the climate-related risks and opportunities that will have an effect on their scheme’s investment and, in the case of defined benefit (DB) schemes, funding strategy, over the short, medium and long term, and assess, on an ongoing basis, the impact of the risks and opportunities identified on the scheme’s investment and, in the case of DB schemes, funding strategy
- assess the resilience of their scheme’s assets, liabilities and investment strategy and, in the case of DB schemes, funding strategy to climate-related risks in at least two climate-related scenarios, including at least one scenario that represents an eventual global average temperature rise of between 1.5°C and 2°C on pre-industrial levels, and publish the results
- select at least one greenhouse gas emissions-based metric and at least one non-emissions-based metric, to set targets annually in relation to at least one of these metrics and to calculate, at least quarterly, the performance of the scheme’s assets against these targets
- publish their TCFD report, inform members and report to the Pensions Regulator.
The DWP proposed a penalty regime for failure to comply, which included a mandatory fine of up to £5,000 for an individual trustee and £50,000 for a corporate trustee for failure to publish a TCFD report and penalties for other breaches which would be subject to the Pension Regulator’s discretion. For example, the Regulator will be given the power to issue compliance or penalty notices where it deems a scheme’s TCFD report to be inadequate.
Following its consultation, the DWP has confirmed that it plans to press ahead with the introduction of these new requirements. However, it has made some changes to the scope and timing of them and to the frequency with which certain activities need to be carried out.
In particular, the DWP has decided to:
- carve out bulk and individual annuity contracts for the purposes of determining whether the relevant asset threshold which determines whether or not these new requirements apply and, if so, when has been met, – however, where the relevant threshold is met, notwithstanding the exclusion of these assets, the trustees would need to take such assets into account in meeting the various governance, risk-management and disclosure requirements
- bring forward its review of the effectiveness of the proposed TCFD aligned reporting and governance measures to the second half of 2023 (from 2024)
- changed the deadline for publishing the new climate-related disclosures to align it with the deadline for producing a scheme’s annual report and accounts
- adjust the reference dates used for the purposes of determining whether a scheme is in scope, from 1 June 2020 to 1 March 2020 for the first wave of schemes, and from 1 June 2021 to 1 March 2021 for the second wave, to give trustees of in scope schemes more time to prepare
- changed the requirements for schemes to report and measure the performance of the scheme’s assets against targets, from quarterly to annually, and
- change the requirement that scenario analysis must be carried out annually, to require trustees to undertake analysis in the first year and every three years thereafter.
Various respondents raised concerns about the difficulties and challenges schemes may face in obtaining the relevant data they need to prepare the new disclosures. The DWP recognises the challenges around data-flow and it says that this is why it has proposed that a number of the requirements should be qualified so that trustees are only expected to comply “as far as they are able”. The draft regulations clarifies that this qualification means that trustees are:
“taking all such steps as are reasonable and proportionate in the particular circumstances taking into account the costs, or likely costs, which will be incurred by the scheme and the time required to be spent by the trustees or people acting on their behalf.”
In addition, the challenges that trustees may face in obtaining relevant data should ease with the FCA’s plans to introduce TCFD reporting requirements for asset managers by the end of 2023. The FCA’s plans will also capture UK-registered large private companies, insurance companies and banks,. The DWP also calls on pension scheme trustees to recognise their role in unlocking and improving the flow of quality data in this context.
When will these new requirements apply?
The timetable for the introduction of these new governance and reporting duties varies based on a scheme’s size and means that:
- Trustees of occupational pension schemes with £5 billion or more in net assets will be required to meet the climate governance requirements and publish a TCFD report in line with the TCFD recommendations within the first 7 months of their first scheme year to end after 1 October 2021 or by 31 December 2022 (at the latest)
- Trustees of occupational pension schemes with £1 billion or more in net assets (but less than £5 billion) will have an additional year to prepare for these measures. Trustees of such schemes will be required to meet the climate governance requirements and publish a TCFD report within 7 months of their first scheme year to end after 1 October 2022 or by 21 December 2023 (at the latest).
- Trustees of master trusts or collective money purchase schemes will be required to meet the climate governance requirements and publish a TCFD report within the first 7 months of their first scheme year to end after 1 October 2021 or by 31 December 2022 (at the latest).
Alongside its consultation response, the DWP has also published for consultation:
- the draft Occupational Pension Schemes (Climate Change Governance and Reporting) Regulations 2021,
- the draft Occupational Pension Schemes (Climate Change Governance and Reporting) (Miscellaneous Provisions and Amendments) Regulations 2021, and
- new draft statutory guidance.
The proposals are also said to be subject to the Pension Schemes Bill, which contains the powers to make regulations in relation to climate change risk, receiving Royal Assent. The consultation closes on 10 March 2021.
The DWP also published an industry guide, produced by the Pensions Climate Risk Industry Group (PCRIG) to help trustees evaluate how climate-related risks and opportunities can affect their strategies.
The guide contains:
- an introduction to climate risk as a financial risk to pension schemes, trustees’ legal obligations and the TCFD recommendations,
- suggestions for how to integrate climate-related risks within the typical governance and decision-making processes of pension trustee boards and how best to disclose this,
- technical guidance on conducting scenario analysis, and
- guidance on setting metrics and targets to measure and manage climate-related risks.
We strongly recommend that trustees refer to this guidance when deciding the steps they need to take to effectively manage climate-related risks and to comply with the new legislative requirements.
The DWP’s response marks an important step towards meeting the goals set out in the TCFD interim report to become the first country in the world to make TCFD reporting mandatory for listed commercial companies.
The DWP recognises the challenges around data-flow, which is why it has proposed only requiring trustees to comply with some of the requirements “as far as they are able”. In addition, the challenges that trustees may face in obtain relevant data should ease with the FCA’s plans to introduce TCFD reporting requirements for asset managers, by the end of 2023. The FCA’s plans will also capture UK-registered large private companies, insurance companies and banks. The DWP also calls on pension scheme trustees to recognise their role in unlocking and improving the flow of quality data.
In addition, the guidance published alongside the consultation by PCRIG, should help schemes to familiarise themselves with these new requirements and the methodology and processes that flow from these.
Trustees of the largest UK pension schemes should therefore begin to prepare for these requirements in the first half of 2022 and understand what is involved in setting metrics and targets and conducting-scenario analysis and what the outputs from these mean in practical terms.