Consultation on proposals to roll out new mandatory requirements

On 26 August, the Department of Work and Pensions released proposals for consultation, seeking feedback on plans for how and when certain pension schemes should be required to adopt new climate governance requirements and to report in line with the Task Force on Climate-related Financial Disclosures (TCFD) recommendations.  The deadline for submissions is 7 October.

'Building back better': an opportunity for pension schemes to contribute to the COVID-19 recovery

In his foreword to the consultation, Minister for Pensions and Financial Inclusion Guy Opperman make clear that he considers it important that the government push forward with the proposed changes now, despite the disruption caused by the pandemic.  Mr Opperman states,

'I recognise too that these proposals come as trustees are dealing with the impact of the COVID-19 pandemic. However, this is also a time of opportunity - as we “build back better”, trustees must turn their minds to the transition to the low carbon economy. And we must ensure that pension scheme governance is as robust as possible to withstand the potential shocks that climate change and our response to it will bring.  Acting now to manage climate risks, and to take advantage of the opportunity of the low-carbon transition, will put schemes in a stronger position for the future. I believe that the proposals are proportionate, especially in light of the size and urgency of the threat – and the magnitude of the opportunities – posed to pension investments by climate change. I welcome trustees’ and all other stakeholders’ views and I ask that we all rise to the challenge'.

Ending 'tick box' disclosures

Another and related aim of the proposed changes flagged in the report, is discouraging 'tick box' disclosures.  The report states,

'High quality TCFD reporting will represent an essential element of good scheme governance, regardless of a requirement to publish.  With that in mind, the proposals in this consultation do not seek to be simply another disclosure requirement. We propose that our policy, and our eventual regulations, will make clear that these changes concern governance decisions, and the disclosure requirements should instead be viewed as part of a wider, robust governance process'.  

What's being proposed

Broadly the proposals fall into three categories:

1. New climate risk governance and reporting requirements: 
   • The introduction of new climate risk governance requirements and targets for the assessment and management of climate risks and opportunities.  
   • New TCFD disclosure requirements.  
2. Application (which trustees should fall into scope of the new obligations) and the proposed timing
3. Penalties for non-compliance.  

New climate risk governance and reporting requirements

Proposed new requirements include the following (among others). 

• Integrate management of climate risk into the overall risk management framework: It's proposed that trustees be required to 'adopt and maintain processes for identification, assessment and management of climate-related risks', to integrate this into their overall risk management and to disclose these processes.  
• Role of trustees in managing climate risk: It's proposed that regulations should require trustees to: 1) 'adopt and maintain oversight of climate risk and opportunities'; and 2) 'establish and maintain processes by which trustees, on an ongoing basis, satisfy themselves that persons managing the scheme, are assessing and managing climate-related risks and opportunities'.  In addition, it's proposed that regulations should require trustees to describe both: 'a) the role of trustees in ensuring oversight of climate-related risks and opportunities; b) the role of those managing the scheme in assessing and managing climate-related risks and opportunities, only insofar as this relates to the scheme itself and the processes by which trustees satisfy themselves that this is being done'.  
• Disclosure of climate risks over the short, medium and long term: It's proposed that regulations will require trustees to 'identify and disclose the climate change risks and opportunities relevant to their scheme over the short, medium and long term, and to assess and describe their impact on their investment and funding strategy'.
• Conduct scenario analysis: It's proposed that regulations should require 'trustees to assess the resilience of their assets, liabilities and investment strategy and, in the case of defined benefit (DB), funding strategy, as far as they are able, in at least two climate-related scenarios, one of which must be a 2°C or lower scenario and to disclose the results of this assessment'.  
• Assess and disclose how climate risk is impacting the scheme's assets: It's proposed that regulations should require trustees to: 'select at least one greenhouse gas (GHG) emissions-based metric and at least one non-emissions-based metric to assess the scheme’s assets against climate-related risks and opportunities and review the selection on an ongoing basis; b) obtain the Scope 1, 2 and 3 GHG emissions of the portfolio, and other non-emissions-based data, as far as they are able; and c) calculate and disclose metrics (including at least one emissions-based metric and at least one non-emissions-based metric) used to quantify the effects of climate change on the scheme and assess climate-related risks and opportunities'.  Where emissions data that is estimated does not cover all asset classes, an explanation should be provided as to why.
• Set and disclose climate targets: It's proposed that regulations will require trustees to set 'at least one target' to manage climate related risks and to disclose this; and to calculate performance against the target(s) 'as far as trustees are able and disclose that performance'. 
• TCFD disclosure requirements: It's proposed that:
  • All schemes in scope be required to provide free access to their TCFD report on a publicly available website 
  • Trustees be required to include a link to the full text of the TCFD report in the Annual Report and Accounts 
  • Trustees be required to notify all members via the annual benefit statement, of the website address for accessing the full TCFD report 
  • Trustees be required to report the location of their published Statement of Investment Principles (SIP), Implementation Statement and excerpts of the Chair’s Statement by including the corresponding website address or addresses in their scheme return. 

Application and proposed timing

• Schemes with £5 billion or more in net assets, trustees of master trust or collective money purchase schemes would be subject to new governance requirements from 1 October 2021, and required to publish a TCFD report by 31 December 2022.  
• Trustees of schemes with £1 billion would have an additional twelve months to implement the governance requirements (1 October 2022) and to report in line with the TCFD recommendations (31 December 2023).  
• Subject to the government adopting the governance/reporting requirements proposed in the consultation, a review would be conducted in 2024 to assess whether the measures should be extended to schemes with less than £1 billion in net assets.  In addition, it's proposed that a any regulations/statutory guidance be reviewed at the same time to assess whether it needs strengthening/updating.

Penalties for non-compliance 

It's proposed that:

• Where The Pensions Regulator (TPR) deems TCFD reports to be inadequate in meeting the requirements in the regulations', it's proposed that the TPR will be given power to administer discretionary penalties.  Penalties would not be mandatory 'except in instances of total non-compliance where no TCFD report is published'.
• Failure to notify members via the Annual Benefit Statement or to include a link to the TCFD report from the Annual Report would be subject to the existing penalty regime in Regulation 5 of the Disclosure Regulations.  
• Otherwise, penalties would be modelled on those in regulations 26 to 33 of the Occupational Pension Schemes (Charges and Governance) Regulations 2015.  

[Source: UK Department of Work and Pensions media release 26/08/2020; Consultation documents]