Pension Schemes Act 2021 – climate change governance and reporting

Timeframe

For the changes relevant to ‘climate change governance and reporting’, regulations will be laid this summer and come into force ahead of COP26, with a proposed date of 1st October 2021. 

Climate change governance and reporting (section 124)

The objective is to protect members’ benefits against the physical risks of climate change and ensure that trustees are properly taking into account the risks and opportunities associated with climate change and the transition to a net zero carbon economy.

The Pensions Regulator (TPR) will be granted a broad range of powers allowing them to intervene in how pension schemes report climate-related risk. The Act also confers powers to require pension schemes to take the Paris Agreement goal into account, in addition to other climate change goals set by the Government. 

Pensions schemes will be required to:

  1. Implement climate change governance measures. 

  2. Produce a Taskforce for Climate-related Financial Disclosures (TCFD) report. 

Phased introduction:

  1. 1st October 2021: Occupational pensions schemes with assets under management (AUM) of more than £5 billion, authorised master trusts and collective money purchase schemes must comply with new regulation.

    - Their first annual TCFD report will have to be produced and published within seven months of the end of the scheme year underway on 1 October 2021.

  2. October 2022: Schemes with AUM of more than £1 billion must comply on the same basis

 

In 2023 there will be a review of the quality of disclosures which will be made public. Changes and further recommendations are likely to follow this in the hope of promoting best practice.

DWP guidance

The cross-government and industry group - Pensions Climate Risk Industry Group (PCRIG) - has recently published (Jan 2021) non-statutory guidance on how to align pension schemes with TCFD recommendations.1

Possible developments after the Pension Schemes Act

  • DWP is looking at the potential for pension schemes to report on the implied temperature rise of their portfolio.

  • Potential to introduce another bill that seeks to include additional disclosures relating to the percentage of pension schemes activities are “green”, in line with a UK taxonomy. 

What do the changes related to climate change mean for trustees of pensions in scope

The Changes Action required

Governance - regulations will require schemes to establish, maintain and disclose the trustees’ governance around climate-related risks and opportunities.

Trustees should clarify, formalise and document their governance policies, including roles, in relation to climate change.

Trustees must disclose:

  • How they maintain oversight of climate-related risks and opportunities which are relevant to the scheme.
  • The role of any person who undertakes governance activities, or who advises or assists the trustees with respect to governance (excluding legal advisers), in identifying, assessing and managing climate-related risks and opportunities and the process by which the trustees satisfy themselves that the person is undertaking such identification, assessment and management.

Strategy - regulations will require the disclosure of the actual and potential impacts of climate-related risks and opportunities on the pension scheme.

Trustees must, on an ongoing basis, identify and then assess the impact of 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 strategy and, where relevant, the funding strategy.

 

Trustees must, as far as they are able, undertake scenario analysis using at least two scenarios where there is an increase in the global average temperature, (one of which is with an average temperature rise of between 1.5°C and 2°C above pre-industrial levels).

Trustees will need to disclose:

  • the potential impact on the scheme’s assets and liabilities of the effects of the global average increase in temperature and of any steps which might be taken (by governments or otherwise) because of the increase in temperature in such scenarios; 
  • the resilience of the scheme’s investment strategy in such scenarios; and 
  • where relevant, the resilience of the funding strategy in such scenarios.

 

Scenario analysis is required in the first scheme year and every three years thereafter.

Risk management - regulations will require disclosure on how the trustees identify, assess and manage climate-related risks.

 

Trustees will need to ensure or start implementing effective processes to identify, assess and manage climate-related risks, and ensure that this is integrated into their overall risk management of the scheme.

This will need to be disclosed in a publicly available report. Schemes have seven months from the end of their scheme year to report on this.

Metrics and targets - regulations will require trustees to disclose the metrics and targets used to assess and manage relevant climate-related risks and opportunities, where such information is material.

 

Trustees must select at least two emissions-based metrics and one additional climate-related metric to calculate in relation to the scheme’s assets. 

 

On an annual basis, trustees must:

  • as far as they are able, obtain the relevant scope 1, 2 and 3 data, plus additional climate change data, of the scheme’s assets and use the metrics calculated to identify and assess the climate-related risks and opportunities relevant to the scheme. 

  • set a target for the scheme in relation to at least one of their chosen metrics and report annually on progress against the target. 

Trustees must have knowledge and understanding of the principles relating to the identification, assessment and management of risks and opportunities to occupational pension schemes arising from the effects of climate change.

 

Trustees must consider trustee training in order to comply with this requirement.

 

Regulations may require trustees and managers to adopt prescribed assumptions about achievement of the Paris Agreement goal (defined by reference to Article 2.1a) and other climate change goals, or the steps that may be taken to achieve them.

 

In the future, trustees may need to oversee the publication of the contribution of schemes’ assets to climate change (the “implied temperature rise” of the scheme).

 

In 2023 there will be a review of the quality of disclosures which will be made public.

 

Trustees must act to disclose high quality information to avoid having to make significant changes to their reports in later years. Training and/or adequate resource allocation may be needed.