Legislation brought forward
On 8 June 2021, the Department for Work and Pensions (DWP) published draft regulations that will lead the way for the G20 nations, by setting out new requirements for the governance of pension schemes in dealing with climate change opportunities and risks.
The new legislation is intended to apply from 1 October 2021 and Parliament is expected to approve the legislation.
There is a great deal of political will behind this reform ahead of the COP26 summit in Glasgow in November. Ahead of the draft Regulations being issued, The Pensions Regulator published its climate change strategy and reinforced the message that climate change needs to be firmly on trustees’ agenda now, even before the legislation is finalised.
The new legislative requirements will mean that trustees of the largest schemes (master trusts and schemes with £5 billion or more in assets) will have to put in place effective governance, strategy, risk management, and accompanying metrics and targets for the assessment and management of climate risks and opportunities.
These must follow the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD).
From 1 October 2022, the requirements will start to apply to pension schemes with £1 billion or more in assets. The aim of this phased approach is to allow the Government to identify best practice and – subject to further consultation – roll out the requirements to small schemes as soon as 2024.
“As far as they are able”
Trustees will be required to undertake the activities listed below “as far as they are able”.
This qualification to the duty recognises that there may be gaps in the data that trustees are able to obtain about their assets when carrying out scenario analysis or calculating metrics; and also about the effect of climate change on their obligations, funding strategy and the employer covenant.
The activities are:
As a result of these changes, the trustee training requirements are to be amended to require trustees to understand the identification, assessment and management of risks and opportunities from steps taken because of climate change.
Trustees will have to report on these matters within seven months of the end of the scheme year and the report will be published on a publicly available website. Members will be informed either by annual DC benefit statements or annual DB funding statements of the availability of the report.
Capita comment
Even for many of the biggest schemes this will be challenging. Much reliance will be on what asset managers and businesses can realistically provide. In any event, we think that there is no time to waste in further developing governance resources.
The policy direction is clear with a strong intent to roll out these requirements down the scale over the next few years. Smaller schemes should anticipate that they will have new obligations potentially as soon as 2024. Trustees should ask for training on these climate change issues and opportunities as soon as it is available. They should also keep an eye on developments and aim to use the best practice developed by the largest schemes. This is a time to start paying attention and planning.
Please speak to your usual Capita contact for further assistance.