February 23, 2021

Climate change risk - consultation on new trustee duties

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The Pension Schemes Act 2021 sets out a framework for new climate risk-related governance and reporting requirements for trustees of larger schemes. The detailed requirements will be set out in regulations and statutory guidance, and the government is currently consulting on draft versions of the regulations and guidance.

The government consulted on the broad policy principles to be contained in the regulations in August 2020. The draft regulations largely implement those principles, but some changes have been made.

The consultation closes on 10 March.

The draft regulations

Among other things, the draft regulations require trustees to:

Have knowledge and understanding of the principles relating to the identification, assessment and management of climate-related risks affecting occupational pension schemes and of climate-related opportunities.
Establish and maintain oversight of the climate-related risks and opportunities which are relevant to their scheme.
On an ongoing basis, identify and assess the impact of climate-related risks and opportunities which they consider will have an effect over the short, medium and long term on their scheme’s investment strategy and, where applicable, funding strategy.
Undertake scenario analysis which includes considering at least two scenarios where there is an increase in the global average temperature. In its August 2020 consultation, the government proposed that scenario analysis would be required annually. However, the draft regulations require scenario analysis to be undertaken in the first year, and then every three years. In other years, trustees must review whether circumstances require them to refresh their analysis. If they decide that they do not need to refresh their analysis, they must explain why.
Establish and maintain processes for identifying, assessing and managing climate-related risks which are relevant to their scheme.
Select a minimum of two emissions-based metrics and one additional climate-related metric. In its August 2020 consultation, the government proposed that trustees would have to obtain the data required to calculate their chosen metrics on a quarterly basis. However, the draft regulations require trustees to obtain the data annually.
Set a target for their scheme in relation to at least one of the metrics which they have selected, and measure the scheme's performance against the target(s) annually (rather than quarterly as the government had proposed in its August 2020 consultation).
Within seven months of the end of each scheme year, publish a report setting out various prescribed matters relating to the trustees' climate-related risk governance, strategy and risk management processes. The report must be signed by the trustee chair and published on a publicly available website.

The Pensions Regulator will have powers to enforce compliance, including the ability to issue fines of up to £5,000 for an individual trustee and £50,000 for a corporate trustee.

The draft guidance

Trustees are required to have regard to the statutory guidance in complying with their climate risk-related governance and reporting requirements.

The draft guidance provides an overview of the new requirements under the regulations and offers guidance on what trustees should do in order to comply with them. In particular, the guidance explains what the requirement in the regulations to undertake certain activities such as triennial scenario analysis “as far as they are able” means.

The guidance refers to activities that trustees “must”, “should” and “may” undertake in order to comply with the regulations.

“Must” – These activities are required by the regulations. Failure to meet them may lead to enforcement action by the Pensions Regulator.
“Should” – Trustees are expected to follow the approach set out. If they choose not to do so, they should include a concise description of their reasons in the relevant section of their annual climate risk report.
“May” – Trustees can follow the approach set out and are encouraged to do so where possible. If they choose not to, they do not have to explain their reasons in their annual climate risk report.

When will the requirements come into force?

The new requirements will apply to schemes as follows:

From 1 October 2021 – occupational pension schemes with relevant assets of over £5 billion.¹
From 1 October 2022 – occupational pension schemes with relevant assets of between £1 billion and £5 billion.

“Relevant assets” means the scheme’s net assets as recorded in the audited accounts for the scheme year ending on or after 1 March 2020 (for the first tranche of schemes in scope) and 1 March 2021 (for the second tranche of schemes). Bulk annuity policies and certain other insurance policies are excluded when calculating the scheme’s relevant assets.

Given the relatively tight timeframe for introduction of the new requirements, schemes that will be in scope should start considering now what processes they will need to put in place in order to comply.

¹ The requirements will also apply to all authorised master trusts and all authorised collective money purchase schemes, regardless of their asset level, from 1 October 2021.