Pension schemes in the UK still have much work to do if they are to adapt to the challenges of climate change, a report from The Pensions Regulator (TPR) has warned.
In its climate adaptation report, published today (Thursday), TPR says too few schemes give enough consideration to climate-related risks and opportunities, which means investment performance and saver outcomes could suffer.
The report explains that while schemes are more engaged, according to a TPR survey less than half of defined contribution schemes (43%) took account of climate change when formulating their investment strategies and approaches when quizzed in 2020.
A survey of defined benefit schemes in the same year showed more than half (51%) had not allocated time or resources to assessing any financial risks and opportunities associated with climate change.
TPR states while it does not underestimate the scale of the challenge for occupational pension schemes it adds that practices are rapidly evolving, and trustees and savers are increasingly more engaged with the need to consider climate-related risks and opportunities.
Charles Counsell, TPR’s Chief Executive, said: “The pension industry still has much work to do to build resilience and assess climate-related risks and opportunities.
“A rapidly warming world brings the risk of more frequent fires, floods or extreme weather – potentially causing the loss of physical assets and supply chain disruption.
“Unless properly managed, these risks have the potential to impact scheme funding, employer covenant and leave some savers facing a poorer retirement.
“Our adaptation report shows much more needs to be done.”
Mr Counsell said trustees should be considering climate change in their scheme’s investment strategies, allocate sufficient time and resources to assessing financial risks and opportunities associated with climate change and ensure process used to manage those risks and opportunities are robust.
He added: “Our report recognises that practices are evolving, and trustees – and savers – are more engaged with the need to consider climate risks. We remain convinced that a landscape of resilient pensions schemes that protect savings from climate risk is entirely within reach.”
The report adds that trustees could see a positive impact from considering climate change in their investment and scheme governance, including on expected returns and the capacity to reduce risk.
For example, there may be opportunities to access new markets and new technologies related to the transition to a low-carbon economy.
Barriers
The report acknowledges that lack of climate-related data could be a barrier for schemes adapting to climate change.
According to feedback to TPR’s supervision teams, industry has warned that availability of climate-related data can be a significant issue for trustees, and this may be a barrier to developing plans to make schemes more resilient.
TPR explained it expected to see improvements in data quality and modelling capabilities as the financial system as a whole moved towards mandatory reporting of climate-related risks and opportunities.
Notes for Editors
- The Pensions Regulator published its climate adaptation report on its website. The report is TPR’s contribution to the National Adaptation Programme’s (NAP) drive to assess the UK’s resilience to climate change. The NAP aims to use a wide range of evidence and analysis to propose actions to UK government and others to help the country adapt to the challenges of climate change.
- The NAP was established by the 2008 Climate Change Act, under which the UK government invites or requires organisations to produce reports on the current and predicted effects of climate change on their organisation and their proposals for adapting to them. The objectives for reporting are to:
- support the integration of climate change risk management into the work of reporting organisations
- contribute to government understanding of the level of preparedness of key sectors to climate change.
- TPR published its report in conjunction with the other financial regulators: the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA).
- TPR published its climate change strategy in April 2021. In July, TPR launched an eight-week consultation on its draft climate-related governance and reporting guidance. The final guidance will be published next month.
- 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).
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