A survey of defined benefit (DB) pension schemes shows they are not as prepared as they should be and need to act ahead of upcoming regulations on climate change.
Proposed regulations, part of the Pension Schemes Act 2021, will require trustees to look at management and governance of climate-related risks and opportunities in more detail. This is in line with Taskforce on Climate-related Financial Disclosures (TCFD) recommendations.
The regulations, due to come into force in October, initially target trustees of schemes with £5 billion or more in assets, master trusts and collective defined contribution schemes.
From October 2022, trustees of schemes with £1 billion or more in assets will be required to comply with the regulations and the Department for Work and Pensions has said in 2023 it will consider whether the measures should be rolled out to smaller schemes.
The Pensions Regulator’s (TPR) annual survey of DB schemes, carried out between October and November 2020, shows too few trustee boards are:
- allocating enough time or resources to assessing financial risks or opportunities associated with climate change
- assessing the risks/opportunities from particular climate-related scenarios
- giving significant consideration to climate change in their investment and funding strategies
- devoting significant consideration to climate-related opportunities
- aware of the work of the TCFD
David Fairs, TPR’s Executive Director of Regulatory Policy and Advice, said: “Climate change is a problem now. So, it’s welcome news some DB trustees are beginning to think about climate-related risks and opportunities. However, our survey shows an alarming proportion of trustees are not grasping the urgency to act.
“For DB trustees, it’s time to get to grips with the way climate-related risks and opportunities affect the employer’s covenant and include climate change in your integrated risk management framework.
“Climate-related risks threaten pension savings and affect funding strategies across the DB landscape.
“This means trustees should build their capacity in this area now, so they can understand what climate change will mean for their scheme and their employer’s covenant, and so be better placed to make decisions contributing towards good outcomes for savers.”
Notes for editors
- The DB survey found that of the 250 respondents:
- only 49% indicated that they had allocated time or resources to assessing any financial risks or opportunities associated with climate change
- the likelihood of allocating time or resources to assessing financial risks or opportunities associated with climate change increased with scheme size, ranging from 19% of micro to 70% of large schemes
- only a minority had processes to manage climate-related risks and opportunities:
- 21% had included climate-related risks to their risk register
- 19% regularly covered climate-related issues at trustee meetings
- 16% included, monitored and reviewed targets in their climate policy
- 12% had assigned responsibility for climate issues to a trustee or sub-committee
- almost three-quarters (71%) were unaware of the Taskforce on Climate-related Financial Disclosures and only 8% made the disclosures it recommends
- The survey also found:
- 14% of schemes had experienced some form of cyber-attack or breach in the previous 12 months. Across all sizes of scheme, the most common type was staff receiving fraudulent emails or being directed to fraudulent websites (9%)
- of those schemes that experienced cyber breaches/attacks in the previous 12 months, almost one-fifth (17%) reported a negative impact, equating to 2% of all DB schemes
- the most common impacts of these cyber-attacks or breaches were personal data being altered, destroyed or taken (7%), temporary loss of access to files or networks (7%) and software/systems being corrupted or damaged (5%)
- TPR published its climate change strategy in April.
- TPR will publish further climate change guidance for schemes in the Autumn.
- The Pensions Regulator 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 (PPF); to promote, and to improve understanding of, the good administration of work-based pension schemes; to maximise employer compliance with automatic enrolment duties; and 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).
