PART 1 – GOING FOR GREEN: CLIMATE RISK GOVERNANCE AND REPORTING REQUIREMENTS FOR OCCUPATIONAL PENSIONS

27 / 07 / 2021

A new regulatory framework…
On 8 June 2021, Guy Opperman (Minister for Pensions and Financial Inclusion) announced the final versions of two sets of regulations 1 (which have now been laid before parliament) which are designed to regulate how trustees of certain trust-based occupational schemes must engage with, and report on, climate change risk as part of their duties (see our March 2021 article for further background Climate Risk for Pension Schemes – the regime from October 2021 – Wedlake Bell).

The DWP also published accompanying 50 pages of statutory guidance which amongst other things sets out how trustees should be meeting climate change governance requirements, the level of trustee knowledge and understanding of climate-related risks and detail on the reporting requirements originally recommended by the Taskforce on Climate-related Financial Disclosures (“TCFD”). The guidance also contains detail on how and when the reporting disclosures must be conveyed via a website to the general public at large.

Which schemes are in scope?
These new requirements will be phased in over the next few years with only the very largest schemes (assets over £5 billion) as well as master trusts and collective money purchase schemes having to meet all the climate change governance requirements from 1 October 2021.

With effect from 1 October 2022, trustees of schemes which have assets over £1 billion will be required to comply with the regulations.

Master trusts which, after 1 October 2021 cease to be authorised and whose assets are less than £500 million will cease to be in scope of the regulations. However, should such formerly authorised master trusts grow in size to over £1 billion, the trustees will again become subject to the regulations.

The role of the Pensions Regulator (“TPR”)
TPR has been tasked with policing non-compliance with the regulations. Enforcement action for failure to publish a report could result in a minimum mandatory penalty of £2,500. The maximum fine for breach of any of the other requirements would not exceed £5,000 for an individual trustee, or £50,000 for a corporate trustee.

Compliance specifics
The regulations impose both governance and disclosure requirements on trustees which cover the following:

Governance
General governanceTrustees must establish and maintain oversight of relevant climate-related risks and opportunities which are relevant to the scheme. This will involve adopting processes to ensure all those who are involved in scheme governance are able to identify and assess climate related risks and opportunities;
StrategyTrustees must, on an ongoing basis, identify climate related risks and opportunities which they consider will have an effect over the short term, medium term and long term on the scheme’s investment and funding strategies;
Risk managementTrustees must establish and maintain processes for the purpose of enabling them to identify, assess and manage
climate-related risks which are relevant to the scheme. Trustees must also ensure that management of climate-related risks is integrated into their overall risk management of the scheme;
Scenario analysisTrustees must undertake in the first year and every three years thereafter, scenario analysis assessing the impact on the scheme’s assets and liabilities, the resilience of the scheme’s investment strategy and where it has one) the scheme’s funding strategy on the potential impact on the scheme of the effects of the global average increase in temperature;
Metrics and TargetsIn the first scheme year that the requirements apply the trustees must select a minimum of two emissions-based metrics as well as one additional climate-related metric to calculate in relation to the scheme’s assets and must review their selection from time to time. Trustees must also set a target for the scheme in relation to at least one of the metrics which they have selected to calculate; and
Trustee knowledge and
understanding
Whilst not statutory guidance, trustees are encouraged to have sufficient knowledge and understanding of the identification, assessment and management of climate change risks affecting occupational pension schemes.
Disclosure
TCFD reportTrustees will be then be required to produce an annual CFD report, to be published on a publicly accessible website, which contains certain information relating to the governance requirements detailed above:
– their oversight of relevant climate related risks and opportunities;
– their analyses of climate related risks and opportunities;
– the likely impact on their scheme of temperature increases in their identified scenarios; and
– the outcomes of their metrics against any selected targets.

The report must be signed by the trustee chair;
Publish on TCFD report on
website
The TCFD report must be published on a publicly available website, accessible free of charge.
A mandatory penalty applies where there is complete failure to publish;
Specific information to
members
The amendments made to the Occupational and personal Pension Schemes (Disclosure of Information) Regulations 2013 by the regulations require trustees who must produce a TCFD report to, among other things:
– include the website address of the TCFD report in the Annual Report; and
– tell members that the TCFD report has been published and where they can locate it by including this information in the Annual Benefit Statement and, for defined benefit (DB) schemes, the Annual Funding Statement; and
TPR notification
requirements
Trustees must provide TPR with the website address containing the TCFD report via the scheme return which the trustees are required to provide in accordance with section 64 of the Pensions Act 2004.

Wedlake Bell Comment
The Government have pledged to tackle climate change. The regulations show the commitment to this far reaching determination for serious changes towards achieving a low carbon economy. Guy Opperman previously stated of the risks of climate change and those affecting the financial sector and wider economy: “I propose embedding in pensions law the recommendations of the TCFD. I make no excuse for the work this entails – we lead the way and I expect others to follow”.

The move to all things “Green” for those involved with pensions is well underway. The additional duties on trustees and advisers are significant and judging by TPR’s views on enforcement and sanctions, this is more than paying lip-service to a global issue.

Time will tell how far reaching the changes extend – the larger schemes are being phased in first and hopefully they will use their market power to drive best practice from asset managers and advisers, and will make it easier to roll out to smaller schemes in due course.

This shift will not be without its teething problems and Clive’s article in this issue of Pensions Compass “Is “Green” Investment Legal?”, already demonstrates that certain areas of the pensions industry do not easily dovetail with the governance and disclosure changes that are afoot.

1 The Occupational Pension Schemes (Climate Change Governance and Reporting) Regulations 2021 and the Occupational Pension Schemes (Climate Change Governance and Reporting) (Miscellaneous Provisions and Amendments) Regulations 2021