A review of a selection of pension schemes’ annual climate reports has revealed several areas of improvement for schemes and some emerging good practice.
From 1 October 2021, new regulations came into effect for trustees of certain schemes aimed at improving the governance and reporting of climate-related risks and opportunities.
These regulations require trustees of some schemes to identify, assess, and manage climate-related risks and opportunities and report on what they have done.
The reporting requirements were developed from the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD).
The Pensions Regulator (TPR) has reviewed a selection of published reports with a view to sharing emerging good practice with schemes.
Louise Davey, Director of Regulatory Policy, Analysis and Advice at TPR, said:
“Although this is a new and emerging area for trustees our review found a great deal of emerging good practice. However, we also identified several areas for improvement trustees should take note of.
“Climate change is likely to continue to pose a core financial risk to savers’ pensions for the foreseeable future, so I urge all trustees in scope of the regulations, and their advisers, to read our review and consider how they can improve their governance and reporting of climate-related risks and opportunities.
“Smaller schemes, not currently in scope, may also find the results of our review useful in improving their management of climate-related risk and opportunities.”
Trustee action
The review found reports ranged in length from 10 to 85 pages, with an average of 34 pages.
Of the 71 reports analysed, 43 had set a formal net zero target. These schemes represented around £450 billion of assets under management and more than 18 million memberships of schemes.
Several reports contained examples of trustees taking appropriate action, including:
- planning climate and sustainability training for trustees and those involved in the governance of climate-related risks and opportunities
- developing a trustee policy on investment beliefs in relation to climate change
- working with investment managers to obtain better data
- allocating more funds to sustainable investments
- using stewardship to manage climate-related risk
- switching to climate-tilted pooled funds
Areas for improvement
While there were several areas of good practice, TPR’s review also found some areas where reports could be improved.
Common issues included:
- a lack of sufficient background information on the scheme meaning disclosures were difficult to interpret – particularly for more complicated arrangements such as hybrid or sectionalised schemes
- disclosures of strategy, scenario analysis and metrics activities were not always provided at the appropriate level as described in statutory guidance from the Department for Work and Pensions (DWP)
- accessibility issues, which could make it difficult for savers and others to find and access reports online, including long or complicated web addresses and use of PDFs not compatible with those using reader accessibility requirements
Some reports missed disclosures required by DWP’s statutory guidance.
As a reminder, the statutory guidance refers to “must” as a requirement imposed by law. When “should” is used, trustees should follow the approach set out, and if they deviate from that approach, they should explain in detail the reasons why they did so.
We expect to see an improvement in this area for the next round of reporting. Where we see a failure to meet these standards, we will consider whether enforcement action is necessary.
Notes to editors
- The governance and reporting of climate-related risks has a phased introduction, initially applying to trustees of all authorised master trusts and larger DB, DC and hybrid schemes with relevant assets of £5 billion or more from 1 October 2021. From 1 October 2022, the requirements were extended to trustees of DB, DC and hybrid schemes with relevant assets of £1 billion or more.
- Trustees of schemes in scope of the regulations who fail to publish their annual climate report may be subject to a mandatory fine of at least £2,500. When it is clear that the trustees have not complied with the regulations in preparing their report we may issue a further penalty of up to £5,000 for individual trustees and up to £50,000 for corporate trustees.
- TPR’s review is based on a combination of a qualitative and quantitative assessment of the data and disclosures in 71 reports. In total around 90 reports are expected for the first year.
- Net zero targets: Where reference is made to 18 million memberships of schemes this is the number of individual memberships not the number of individual savers as some savers are members of more than one scheme.
- TPR is the regulator of work-based pension schemes in the UK. Our statutory objectives are:
- to protect members’ benefits
- to reduce the risk of calls on the Pension Protection Fund
- to promote, and to improve understanding of, the good administration of work-based pension schemes
- to maximise employer compliance with automatic enrolment duties
- to minimise any adverse impact on the sustainable growth of an employer (in relation to the exercise of the regulator’s functions under Part 3 of the Pensions Act 2004 only)
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