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Ignoring climate change risks savers' retirements, TPR warns

Ref: PN21-12

Issued: Wednesday 7 April 2021

A new climate change strategy published today by The Pensions Regulator (TPR) calls on scheme trustees to act now to protect savers from climate risk.

The new strategy comes ahead of proposed regulations which will require trustees of larger schemes to maintain oversight of, and make mandatory disclosures in relation to, climate risks.

Beyond these proposed requirements, the strategy outlines TPR’s expectations that all scheme trustees will comply with existing requirements to publish their statement of investment principles (SIP) - including their policies on stewardship and financially material environmental considerations - and implementation statement.

The regulator says these disclosures represent compliance with the basics on climate change. Where schemes do not comply, and it is appropriate to do so, TPR will take enforcement action.

David Fairs, TPR’s Executive Director of Regulatory Policy, Analysis and Advice, said: “Driving trustee action on the risks and opportunities from climate change will create better outcomes in later life for workplace savers.

“Our strategy outlines how we will help trustees comply with the new rules for larger schemes, but it signals work on climate change needs to happen right across the pensions landscape - climate change is a risk for schemes whatever the size or investment strategy. It is clear that all schemes need to build their capacity in this area if they haven’t already.

“This should include devoting more board time to climate change, considering specific training, and, most importantly, integrating consideration of climate change right across decision-making.”

He explained that building capacity means trustees will be better placed to understand what climate-related issues mean for their scheme - and better able to make decisions which contribute to good saver outcomes.

Mr Fairs added: “Where we do not see schemes complying with the rules, we will consider enforcement action.

“Our strategy also shows how we, as an organisation, will play our part in the UK’s transition to net zero.”

Minister for Pensions Guy Opperman said: “I welcome TPR stepping up on this issue - by increasing oversight of climate change and giving it the weight it deserves they can provide better protection for pension savers from significant financial risk.

“In particular, I applaud the commitment to update the Trustee Toolkit, and to properly enforce compliance with the basics.”

All schemes have been required to include their policies of financially material environment, social and governance considerations in their statement of investment principles (SIP), since October 2019.

The proposals under the Pension Schemes Act will see larger schemes and all master trusts required to disclose their Taskforce on Climate-related Financial Disclosures (TCFD) report. By the end of 2023, TPR anticipates a significant amount of pension savings will be in schemes reporting in line with the TCFD recommendations - 81% of memberships and 74% of occupational pension scheme assets.

TPR is planning to publish guidance later this year, following engagement with industry, to help schemes comply with the new legislation and make consideration of climate change risks and opportunities part of their systems of governance.

TPR will also use its relationship supervision approach to encourage trustees to pay more attention to climate change in the building of portfolios and investment selection and to engage with their investment managers to ensure they steward investments in line with trustees’ policies and best practice laid out in the UK Stewardship Code 2020. 

Notes for editors

  • Statement of investment principles: Trustees must already produce a statement of investment principles (SIP) setting out their policies on financially material ESG considerations (including climate change), the extent to which non-financial matters are taken into account in investment decisions, and policies on stewardship. Trustees must publish their SIP online.
  • Implementation statement: In annual reports prepared after 1 October 2020, trustees have to produce an implementation statement describing whether certain policies in the scheme’s SIP have been followed and trustees’ voting behaviour. This will have to be published by 1 October.
  • Green Finance Strategy: TPR’s work on climate change is in line with the government’s Green Finance Strategy. This strategy aims to sets out steps towards the levels of investment in green and low carbon technologies, services and infrastructure needed to meet the government’s commitment to bring domestic greenhouse gas emissions to net zero by 2050.
  • Taskforce on Climate-related Financial Disclosures (TCFD): To meet the net zero target (see above), climate and environmental factors need to be fully integrated into mainstream financial decision-making across all sectors and asset classes. The TCFD is an international initiative set up to achieve this. Its recommendations have become a key framework for a co-ordinated approach putting climate change at the heart of financial decision-making. In the GFS (see above), the government set out an expectation that large asset owners would disclose in line with TCFD recommendations by 2022.
  • The Pensions Schemes Act 2021: For occupational pension schemes, expectations in the GFS are being taken forward through regulations being made under the Pension Schemes Act 2021, which will write climate change into pensions law in the most comprehensive way to date. These proposed regulations for prescribed schemes adapt TCFD recommendations to make them relevant to trustee decision-making structures.
  • The Pensions Regulator: 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 (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).

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