In our September Update we reported on the government's consultation "Taking action on climate risk: improving governance and reporting by occupational pension schemes" on proposals to impose detailed reporting and governance obligations on trustees of the largest occupational pension schemes (broadly, those with assets of £1 billion or more) and authorised master trusts (regardless of size) in relation to climate risk.
(The obligations will also apply to trustees of authorised schemes providing collective money purchase benefits under the new regime provided for by the Pension Schemes Act 2021.) Alongside its consultation response in relation to the original policy proposals, the government has also published for consultation the draft regulations to give effect to the changes, and also draft statutory guidance.
The regulations include requirements for trustees of schemes that are in scope to:
- "establish and maintain oversight of the climate-related risks and opportunities that are relevant to the scheme";
- establish and maintain processes to ensure that others undertaking governance activities in relation to the scheme take adequate steps to identify, assess and manage climate-related risks and opportunities;
- ensure advisers (other than legal advisers) take adequate steps to identify climate-related risks and opportunities which are relevant to the matters in respect of which they are advising;
- identify climate-related risks and opportunities for the scheme's investment and funding strategies over the short, medium and long term and assess the impact of those risks and opportunities on an ongoing basis;
- undertake scenario analysis considering the impact on the scheme of at least two scenarios involving global average temperature increases (at least one of which must include a global average temperature increase in the range of 1.5 to 2 degrees Celsius above pre-industrial levels). Such analyses must be carried out at least every 3 years;
- establish and maintain processes to identify and manage climate risks relevant to the scheme and ensure that such processes are integrated into their overall risk management;
- select metrics which give the total greenhouse gas emissions and the total carbon dioxide emissions per unit of currency invested by the scheme, as well as one other climate change-related metric; set a target for the scheme in relation to at least one of those metrics; measure performance against the target on an annual basis; and consider whether the target should be retained or replaced;
- produce and publish a report within 7 months of each scheme year end meeting detailed reporting requirements relating to the actions taken by the trustees to fulfil the various duties listed above.
The consultation on the draft regulations runs until 10 March 2021.
The consultation response says that the new duties will not supersede the trustees' fiduciary duty, and that the impact of investments on the planet will only to be taken into account insofar as they are a financially material risk to the scheme.
Reliance on third parties for relevant information
The consultation response acknowledges concerns that sections of the "investment chain" on which trustees rely for data are not being held to the same regulatory standards. It says that the government intends to make disclosures aligned with the Task Force on Climate-related Financial Disclosures (TCFD) mandatory across the economy by 2025, with a significant proportion of mandatory requirements in place by 2023. It says that the FCA plans to consult on TCFD-aligned rules for fund managers and workplace personal pension schemes in the first half of 2021.
The new requirements come into force as follows:
- occupational pension schemes (other than authorised master trusts) with assets of at least £5 billion as at the first scheme year end date falling on or after 1 March 2020: from the first day falling on or after 1 October 2021 on which the trustees had obtained audited accounts in relation to that scheme year end date;
- authorised master trusts (regardless of size) from 1 October 2021; and
- occupational pension schemes (other than authorised master trusts and schemes falling in the £5 billion category above) that have assets of at least £1 billion on the first scheme year end date falling on or after 1 March 2021: from the first day falling on or after 1 October 2022 on which the trustees had obtained audited accounts in relation to that scheme year end date.
The trustees are required to report within 7 months of the scheme year end date in which they were required to comply with the requirements of the regulations.
There is a carve out for annuities for the purposes of calculating asset value.
The government intends to conduct an interim review in the first half of 2023 on whether to extend the measures to smaller schemes from late 2024 or early 2025.