New legal requirements on climate change?
The Pension Schemes Act 2021 and draft regulations, expected to come into force in October 2021, will require trustees to put in place measures in a variety of areas relating to climate change. The Pensions Minister Guy Opperman is on record committing to bringing the provisions and regulations into force before the United Nations Climate Change Conference (COP26) in November and has announced a call for evidence on the extent to which pension schemes integrate financially material social factors into investment decision making and stewardship activities. This suggests that the focus in relation to ESG will begin to switch from environmental concerns to social ones.
Guidance from The Pensions Climate Risk Industry Group – Aligning your Pension Scheme with TCFD Recommendations was issued in January.
Initially, trustees of schemes with at least £5bn of net assets and all sizes of authorised master trusts and collective defined contribution schemes must comply from 1 October 2021. For schemes with at least £1bn of net assets at the scheme year end on or after 1 March 2021, the relevant date is 1 October 2022.
Smaller schemes are not affected yet, but the position will be reviewed in 2023 and trustees of these schemes should start thinking now about what they will need to do.
Once a scheme is within scope the trustees must produce and publish – on a publicly available website – their Task Force for Climate-related Financial Disclosures (TCFD) report covering the new requirements within 7 months of the scheme year end. Members need to be made aware of the report and there will be penalties – both mandatory and discretionary – for failure to comply.
Trustees need to identify and assess, on an ongoing basis, the impact of climate-related risks and opportunities on the scheme’s investment strategy and for DB schemes their funding strategy, over the short, medium and long term – including the impact of climate change on employer covenant, bearing in mind that climate change issues are not just confined to companies with obvious climate related risks like mining and oil companies, but pervade all sectors and almost all employers.
Trustees also need to undertake scenario analysis in the first year the climate change requirements apply and then at least every three years, assessing the impact on the scheme’s assets and liabilities and the resilience of the scheme’s investment strategy. At least two scenarios need to be developed and one of those should correspond to a global average temperature rise of between 1.5 and 2*C. They will need to set metrics and measure performance against them and they’ll need to check the capability of their advisers in this area.
This is an area where trustees are likely to need to develop their knowledge and understanding and put in place new processes to comply with the requirements – even schemes which are not yet affected would be well advised to start getting up to speed now.