The Pensions Regulator (TPR) has published its strategic response to climate change and confirmed how it will try to help trustees to meet the challenges presented by it.
The strategy picks up existing trustee duties and the new climate risk governance and reporting requirements which are expected to start to apply to the largest pension schemes from October 2021. It also sets out TPR's aims, objectives and approach to helping pension schemes to deal with the "systematically significant" impact of climate change.
Aims and objectives
The strategy sets out TPR's primary aims in relation to climate change:
- to "create better outcomes in later life for workplace savers by driving trustee action on the risks and opportunities from climate change";
- to "seek to influence debates around pensions and climate change"; and
- to "as a business, take part in the transition to net zero".
Each of the aims are supported by specific objectives. For example, in relation to influencing the debate, TPR plans to use communications to help "nudge" pension schemes to comply with legislation and take account of guidance. To aid its own transition to net zero, TPR will look at is own environmental impact, publish a Climate Adaptation Report before the UNCOP26 climate change conference this November and set a 2030 net zero target.
The strategy sets out TPR's approach to regulation in the context of climate change under the following categories:
- Setting clear expectations: For example, TPR will publish guidance on the new climate risk governance and reporting requirements which, from October 2021 will start to apply to schemes. It will also work with the Department for Work and Pensions to share best practice Taskforce on Climate-related Financial Disclosures (TCFD) reports. There will be guidance on how to consider climate change as part of Integrated Risk Management (the impact on covenant, as well as actuarial and investment risk). As we have seen, TPR's new code of practice will include sections on climate change and stewardship. The climate change content in TPR's Trustee Toolkit will be updated.
- Identifying risk early: TPR will carry out a thematic review on scheme resilience to climate-related scenarios, publish its findings and use these to inform updates to guidance. It will also carry out a review of implementation statements (which contain details of a scheme's stewardship and engagement activities) and again publish its findings. TPR also encourages trustees to sign up to the 2020 UK Stewardship Code, "which outlines best practice on improving investment governance and risk management while driving long-term success of companies; and on communicating activity and progress towards addressing systemic risks such as climate change".
- Driving compliance through supervision and enforcement: TPR will train its staff so that they are confident to talk about climate change and (in line with regulations) expand scheme returns to ask for the web addresses for scheme's published statements of investment principles (SIPs), implementation statements and TCFD reports. TPR will also publish on its website a list of web addresses for published SIPs.
- Working with others: TPR will continue to work with other regulators, participate in relevant groups and keep up to date with related work streams in connection with climate change. It will also include climate change in its dialogue with stakeholders.
- Influencing the debate: For example, TPR will be an "active, influential and bold" voice in debates about tackling climate change using financial levers while maintaining the best outcomes for savers. It will continue to work with government to help develop policy, and will publish a report in the autumn of 2021 in which it will set out its findings on how pension schemes are responding to and managing climate change risks and opportunities.
Osborne Clarke comment
This strategy is the latest in a series of changes in the law and other developments which remind pension scheme trustees of the importance of stewardship and the need to take action to respond to and manage climate change risks and opportunities.
The strategy confirms that this is important for all schemes, defined benefit and defined contribution (DC), and flags the need for "particular urgency" by the trustees of DC schemes, "where savers carry the direct financial risk on their investments" and the "pensions they will receive are more directly dependent on investment decisions made by trustees".
Trustees might like to discuss this new strategy with their advisers, perhaps as part of a wider review of compliance with current legal requirements (for example, relating to the SIP and implementation statement) and of action in response to the new climate risk governance and reporting requirements. They should also look out for further guidance from TPR, in particular on the new governance and reporting requirements.
Employers might like to discuss the changes with their trustees, with a view to working together on these important climate change issues where possible.
Osborne Clarke's pensions and cross-disciplinary decarbonisation teams are helping our clients to understand what they need to do to respond to climate risk legal 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.