TPR says climate change is likely to continue to pose a core financial risk to pensions
The Pensions Regulator (TPR) says its review of a selection of pension schemes’ annual climate reports has revealed several areas of improvement for schemes and some emerging good practice.
From 1 October 2021, Taskforce on Climate-related Financial Disclosures (TCFD) requirements came into effect for larger schemes and master trusts - rules that required trustees to identify, assess, and manage climate-related risks and opportunities and report on what they have done.
TPR said it has reviewed a selection of published reports with a view to sharing emerging good practice with schemes.
TPR director of regulatory policy, analysis and advice Louise Davey said: "Although this is a new and emerging area for trustees our review found a great deal of emerging good practice. However, we also identified several areas for improvement trustees should take note of.
"Climate change is likely to continue to pose a core financial risk to savers' pensions for the foreseeable future, so I urge all trustees in scope of the regulations, and their advisers, to read our review and consider how they can improve their governance and reporting of climate-related risks and opportunities.
"Smaller schemes, not currently in scope, may also find the results of our review useful in improving their management of climate-related risk and opportunities."
Trustee action
The review found reports ranged in length from ten to 85 pages, with an average of 34 pages.
Of the 71 reports analysed, 43 had set a formal net zero target. These schemes represented around £450bn of assets under management and more than 18 million memberships of schemes.
Several reports contained examples of trustees taking appropriate action, including:
- planning climate and sustainability training for trustees and those involved in the governance of climate-related risks and opportunities
- developing a trustee policy on investment beliefs in relation to climate change
- working with investment managers to obtain better data
- allocating more funds to sustainable investments
- using stewardship to manage climate-related risk
- switching to climate-tilted pooled funds
Areas for improvement
While there were several areas of good practice, TPR's review also found some areas where reports could be improved.
It said common issues included:
- a lack of sufficient background information on the scheme meaning disclosures were difficult to interpret - particularly for more complicated arrangements such as hybrid or sectionalised schemes
- disclosures of strategy, scenario analysis and metrics activities were not always provided at the appropriate level as described in statutory guidance from the Department for Work and Pensions (DWP)
- accessibility issues, which could make it difficult for savers and others to find and access reports online, including long or complicated web addresses and use of PDFs not compatible with those using reader accessibility requirements
In addition, it said some reports missed disclosures required by DWP's statutory guidance.
It also reminded trustees that its statutory guidance refers to "must" as a requirement imposed by law - adding that when "should" is used, trustees should follow the approach set out, and if they deviate from that approach, they should explain in detail the reasons why they did so.
TPR said it expected to see an improvement in this area for the next round of reporting - warning that, where it saw a failure to meet these standards, it would consider whether enforcement action is necessary.
