DWP responds to consultation on climate risk governance and reporting

Written on 16 Jun 2021

In the latest of our series of Insights on the Pension Schemes Act 2021, we look at what has changed in the final draft regulations and guidance expected to be implemented later this year.

The Department for Work and Pensions (DWP) has issued its response following its consultation on new requirements for occupational pension schemes in relation to the governance and reporting of climate related risks.

The DWP has stated that the proposals received broad support and it now plans to legislate in the summer to implement the new requirements. Therefore, once enacted, the new requirements will apply to the largest pension schemes and authorised master trusts with effect from 1 October 2021.

Response to consultation

Although the consultation response addresses various points that respondents have requested further clarity or minor changes on, the primary obligations which will apply to trustees of pension schemes within scope are unchanged from those first proposed by the DWP in January 2021.

The DWP has updated the draft regulations and statutory guidance to clarify the points raised, but these do not alter the fundamental principles that we summarised in our previous Insight.

Some of the clarifications and changes made by the DWP include:

  • tweaking the definition "relevant insurance contracts" to capture a wider range of bulk annuity contracts ("relevant insurance contracts" are excluded from the definition of "relevant assets" and the level of "relevant assets" dictates whether schemes are within scope);
  • clarifying that where trustees are subject to the requirements for part of a scheme year, the report need only cover that part scheme year;
  • providing that whenever trustees undertake fresh scenario analysis, the triennial cycle is automatically re-set to three scheme years thereafter;
  • clarifying that trustees may rely on scenario analysis done in the first scheme year, but in advance of the date from which the requirements apply;
  • providing that trustees will not have to collect and report on "Scope 3" emissions in the first scheme year that they are subject to the requirements;
  • clarifying that the requirements will apply at a scheme level (that is, not at section level);
  • clarifying that target setting must take place during the first scheme year for which the regulations apply (not the first day on which the regulations apply) and that performance must be measured each scheme year, rather than annually; and
  • clarifying that the trustee knowledge and understanding requirements will not require a "mastery of technical detail" but should be more than “basic”, trustees should be able to understand analysis they receive.

Impact on other trustee duties

The DWP's response again makes it clear that the new requirements are not intended to force trustees to invest in a specific way by providing that:

  • "the measures will not, and cannot, be used to direct pension scheme investment in any way. None of our changes following the consultation on draft Regulations and draft Statutory Guidance undermine this"; and
  • "Ultimately, trustees have primacy in investment decisions; it is not for the government to direct trustees to sell or buy certain assets and these proposals do not create any expectation that schemes must divest or invest in a given way".

The new requirements are intended to complement the existing trustee duties to consider financially material risks when making decisions about a scheme's investments but trustees will have a specific legal duty to "actively consider the risks that a transition to a low carbon economy brings".

Osborne Clarke comment

Trustees of pension schemes with assets of £1 billion or more, and trustees of master trusts, need to discuss the new requirements now with their advisers so that they can start to prepare for them coming into force. This will be either later this year (where they have assets of £5 billion or more, or for master trusts) or in October 2022 (where they have assets of between £1 billion and £5 billion).

The DWP will carry out a review in 2023 to consider the effectiveness of the new requirements and whether they should be extended for small schemes. However, trustees of all pension schemes should continue to monitor developments in this area ahead of that review as guidance and practice in this area is continually evolving. The Taskforce on Climate-related Financial Disclosures (TCFD) is consulting on updated recommendations, the UK government intends to make TCFD disclosures mandatory in part by 2023 and the DWP has set up a working group in relation to stewardship, each of which could impact practices in this area.

Osborne Clarke's pensions and cross-disciplinary decarbonisation teams are helping our clients to understand what they need to do to prepare for the new governance and disclosure requirements, along with the wider regulatory, legal and business challenges that decarbonisation brings. Please contact one of the experts below, or your usual Osborne Clarke contact, to discuss how we can help your business.

 

Read the other Insights in this series:

Climate risk governance and reporting duties: new obligations for occupational pension schemes.

New criminal offences: the Pensions Regulator consults on its policy.

DWP provides more detail on new contribution notice and investigatory powers provisions

New regulations put trustees 'in the driving seat' in the fight against pension scams

New code and guidance for contribution notices