The Department for Work and Pensions (DWP) published a consultation on 26 August 2020 which covers action on climate risk, together with governance and reporting requirements for pension schemes from 1 October 2021. Initially, large schemes with £5 billion or more in assets, authorised master trusts and collective money purchase schemes will be covered.
The DWP is seeking feedback on its proposals to require trustees of large occupational pension schemes to:
- Implement effective governance, strategy, risk management and associated metrics / targets for assessing and managing climate risks and opportunities, from 1 October 2021.
- Provide climate risk disclosures which are in line with the Task Force on Climate-related Financial Disclosures (TCFD) recommendations (in other words, publish a TCFD report) on a scheme or scheme sponsor's website, within seven months of the end of the scheme year, or by 31 December 2022 (if earlier).
The proposal is to implement these changes under amendments to the Pension Schemes Bill, which is currently passing through Parliament. The consultation follows guidance that was provided in a previous consultation "Aligning your pension scheme with the TCFD recommendations" which closed on 2 July 2020. This provided trustees of occupational pension schemes with non-statutory guidance in terms of assessing, managing and reporting climate-related risks in line with the TCFD recommendations.
The consultation proposes a set of requirements that support the 11 TCFD recommendations for all organisations. These are aimed at identifying, assessing, managing and disclosing climate-related financial risks and opportunities. The key reporting requirements of in scope schemes and actions for trustees can be divided into four areas, as follows:
- Establish and maintain, on an ongoing basis, oversight of climate-related risks and opportunities.
- Ensure processes are in place so that trustees satisfy themselves that persons managing the scheme are assessing and managing climate-related risks and opportunities.
Strategy / scenario analysis
- Identify, on an ongoing basis, climate related risks and opportunities that will have an effect on scheme investments and, in respect of defined benefit (DB) schemes, focus on their funding strategy, over the short, medium and long term and assess the impact of these risks and opportunities.
- The proposed requirements stipulate that schemes would be required to use scenario analysis on an annual basis to assess the scheme's resilience to climate-related risks.
- The proposals require trustees to adopt and maintain, on an ongoing basis, processes for identifying, assessing and managing climate-related risks into their overall risk management framework.
Metrics and targets
- Trustees must publish either at least one greenhouse gas emissions-based metric or at least one non-emissions based metric..
- Trustees should, at least annually, set at least one target for one of the metrics that they choose to publish and measure against target on at least a quarterly basis.
The DWP acknowledges that trustees are dependent on data flows and information from other entities in the investment chain. Therefore, the DWP proposes that trustees will only be required to obtain emissions data of their investments "as far as they are able".
Schemes will be required to:
- Publish their TCFD report on their own website, or the website of the scheme's sponsor, along with a link to the report in their annual report and accounts. Trustees will need to notify scheme members via their annual benefit statement that the TCFD report has been published and where they can view it .
- Provide the Pensions Regulator with the web address of where they have published their TCFD report via the annual scheme return form. Trustees will also be required to link to their Statement of Investment Principles and the excerpts of the Chair's Statement in the annual scheme return form.
The government proposes that statutory guidance will contain details of what the TCFD reports should contain.
Application of the requirements
The proposals will apply from 1 October 2021 to trustees and employers of occupational pension schemes with £5 billion or more in assets, authorised master trusts and collective money purchase schemes. This will then be rolled out to schemes with assets of more than £1 billion from 1 October 2022, subject to a further review in 2024, with regard to extending the requirements to all schemes.
Penalties for non-compliance
The DWP proposes a mandatory penalty of at least £2,500 for failure to publish a TCFD report. The Pensions Regulator has discretion to issue fines for other breaches. The maximum fine will be £5,000 for an individual trustee and £50,000 for a corporate trustee.
A failure to reference the TCFD report in the scheme's Annual Report, or to notify members in the Annual Benefit Statement, will be subject to the existing penalty regime on disclosure of information.
The consultation does not yet include requirements to report implied temperature rises (the warming potential / temperature score) in line with the terms of the Paris Agreement, but a consultation is expected on this in the near future.
Osborne Clarke comment
If implemented, these proposals will significantly expand upon the existing duties of pension scheme trustees in relation to environmental, social and governance (ESG) factors and the extent to which these have an impact on their investment decisions and scheme members' savings.
We expect that the proposals will be adopted through amendments to the Pension Schemes Bill. It is now proceeding through the House of Commons, having passed through its stages in the House of Lords. The consultation closes on 7 October 2020.
There are further consultations expected on regulations to implement the changes later this year or in early 2021. Although the proposals will initially apply only to larger schemes, trustees and employers of all scheme asset sizes should continue to monitor developments in this area to ensure they are in the best position possible to comply with future requirements, particularly given the direction of travel on climate risk.