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Draft appendix: breaches of the Climate Change Governance and Reporting Regulations

Important

This is a proposed appendix to The Pensions Regulator’s (TPR) monetary penalties policy (PDF, 68kb, 17 pages). Following the consultation and any subsequent changes, this appendix will be added to the MPP.

The proposed Occupational Pension Schemes (Climate Change Governance and Reporting) Regulations 2021 ('the Climate Change Governance and Reporting Regulations') require the trustees of certain schemes, including authorised master trusts, to introduce measures to identify, assess and manage climate-related risks and opportunities, and produce a report describing the steps they have taken.

Where trustees fail to publish their climate change report on a publicly available website, accessible free of charge and within the required timeframe, we must issue a mandatory fine. In all other cases where we are of the opinion that a person has contravened the Climate Change Governance and Reporting Regulations, we have a range of enforcement options, including the discretion to issue a penalty notice.

Mandatory penalty

The Climate Change Governance and Reporting Regulations require us to issue a mandatory penalty where the climate change report is not published on a publicly available website, accessible free of charge, within the required timeframe.

The minimum penalty for a breach of the publication requirement is set in legislation and is £2,500. The maximum penalty is £5,000 if some or all of the recipients are individuals or £50,000 in any other case (for example, corporate bodies). Where there is more than one trustee, the penalty notice must be issued to all trustees and must state that they are jointly and severally liable for the penalty.

We will generally approach decisions on the amount of the mandatory penalty as follows:

  • All schemes receive the minimum penalty of £2,500.
  • Any consecutive penalty will normally be at least £5,000 to reflect the seriousness with which we view repeated or ongoing breach of legal requirements.
  • Where the scheme has a professional trustee in place the minimum penalty will generally be £5,000 as we expect higher standards from professional trustees.
  • We will also consider, in each case, whether it would be appropriate to issue a penalty higher than the minimum amount set out above, applying the same kind of approach that we adopt when determining the amount of a discretionary penalty. Examples of factors which we will take into account include the following:
    • The nature of the body being fined - individual or other (for example, corporate body). The maximum penalty is lower if some or all of the recipients of the penalty notice are individuals.
    • The impact of the breach: both the number of members affected, and the significance of any detriment suffered.
    • Whether we consider that a higher amount penalty might be more effective in changing the behaviour of the person in breach.
    • The reasons for the failure. For example, we would be more likely to consider a higher fine in cases where the failure to comply with publication requirements is based upon a failure to comply with the underlying governance requirements.

If there are underlying breaches of the governance requirements, we may also consider issuing a discretionary penalty for the underlying breaches, in addition to issuing the mandatory penalty.

There may be cases where there are extenuating circumstances, meaning that we need to consider whether the penalty amount determined in accordance with these factors is reasonable. However, the penalty will always be a minimum of £2,500, as required by legislation. When we are notified of extenuating circumstances we will consider them on a case by case basis.

Discretionary penalties

In considering whether to impose a discretionary penalty under the Climate Change Governance and Reporting Regulations, we will adopt the approach set out in the monetary penalties policy in respect of other discretionary penalties. Please note that any penalties must be issued on a joint and several liability basis, so section 10 of that policy will apply.

In addition to imposing a penalty for a failure to comply with requirements on governance and reporting of climate-related risks and opportunities, we may also consider taking other regulatory action, including investigation and exercising other powers. Such action may also result in further penalties.

'As far as they are able'

A number of the provisions in the Climate Change Governance and Reporting Regulations state that trustees must take certain steps 'as far as they are able'. For example, paragraph 6 of the Schedule states that 'Trustees must, as far as they are able, undertake scenario analysis'. This means that to meet this requirement, trustees must take reasonable and proportionate steps, taking into account costs and time commitments. As there is joint and several liability, we will look at the actions of the trustees as a whole.

As trustees only have to carry out these tasks 'as far as they are able', the legislation recognises that there may be limitations on what they can reasonably do. Trustees should refer to the Department for Work and Pensions' (DWP) guidance 'Governance and reporting of climate change risk: guidance for trustees of occupational schemes' . This gives further information on how there may be gaps in the data relating to climate change risks that trustees are able to obtain, or limitations on trustees’ ability to quantify certain risks, or carry out scenario analysis. Where such problems are encountered, we expect trustees to be able to describe and explain the steps they have taken to ensure compliance with their legal obligations, the obstacles they have encountered, and the impact those obstacles have had. We would also expect them to have documented the position so that they can demonstrate and explain their actions. For example, trustees will need to explain what efforts they have made to obtain the data, and to fully explain any gaps. They should also outline their plans for overcoming those obstacles, as the quantity and quality of the data available should improve for future reporting periods.

An interpretation of ‘as far as they are able’ will be scheme specific and so we will consider whether the legislative conditions have been met on a case by case basis.

Amount of the discretionary penalty

Our approach to calculating the amount of the discretionary penalty will be in line with section 9 of the monetary penalties policy. The amount of the monetary penalty will generally depend on the persons concerned, band level and any aggravating or mitigating factors.

Examples of likely band levels are shown in the table below. We are likely to treat a failure to make an individual disclosure in an otherwise comprehensive climate change report as a band level 1 breach or a band level 2 breach, depending on the facts of the case and the impact of the failure. For example, a failure to disclose scheme resilience in different temperature scenarios would make it more difficult for a scheme member to see the implications of different temperatures for their pension savings, and so may be treated as band level 2 breach. However, a failure to disclose a description of the role of a person who assists the trustees with scheme governance may not have such an impact for a scheme member, and so would be more likely to be treated as band level 1.

We are likely to treat a failure to carry out the underlying governance activities – as distinct from a failure to make disclosures - as a band level 2 or 3 breach. However, we may depart from this where we consider it appropriate, depending on the facts of a case.

If there are multiple breaches of the regulations, this will be treated more seriously. For example, if trustees breached one or more of the requirements in each of the four core areas (Governance, Strategy, Risk management, Metrics and targets), this would be likely to be treated as a band level 3, as it would raise concerns about whether they had established the consistent approach to action and disclosure that is required by the regulations.

Band level (nature and impact/ potential impact of breach) Examples Type of person Range (£) (subject to statutory maximum)
1 Failing to get the climate change report signed by the chair Individual 0–1,000
 Any other case  0–10,000
;2 Failing to disclose scheme resilience in the scenarios analysed Individual 2,500
 Any other case  0–25,000
3 Multiple breaches of the requirements to have proper governance of the risks and opportunities arising from climate change, with at least one breach in each of the four core areas (Governance, Strategy, Risk management, Metrics & targets). Individual 5,000
Any other case 50,000

As with other discretionary penalties, we will take the nature and impact of a breach into account when determining what band level it falls into.

Where there is an underlying breach – for example, where there has been a failure to comply with a compliance notice issued to remedy a pre-existing breach – we will consider the nature and impact of the underlying breach. See sections 9.2 and 9.3 of the monetary penalties policy.