United Kingdom: New climate risk reporting rules for pension funds

Employer Action Code: Act

The Occupational Pension Schemes (Climate Change Governance and Reporting) Regulations 2021 take effect on October 1, 2021, for pension plans (including authorized master trusts and collective defined contribution plans) with assets over 5 billion pounds sterling. Plans with assets over 1 billion pounds will have to comply by October 1, 2022. The new requirements are based on a framework developed by the international Task Force on Climate-related Financial Disclosures (TCFD). The Financial Stability Board established the TCFD to develop recommendations “for more effective climate-related disclosures” that could promote more informed decisions and aid understanding of the climate-related risks in the financial system. While the U.K. is set to be the first major national economy to require pension plans to consider and report on climate risks, the issue of course is a global one, and so related types of actions potentially may follow elsewhere. Similar disclosure requirements already apply to Institutions for Occupational Retirement Provision plans in the European Union as covered in a previous Global News Briefs article: EU: New sustainability disclosures required for pension funds.

Key details

The regulations require plan trustees to carry out certain activities and to report on how each of these requirements has been met. The report must be signed by the chair of the plan trustees and published on a publicly available website within seven months from the plan year end. Actions to be taken by trustees include:

Governance

Establish and maintain oversight of the climate-related risks and opportunities relevant to the pension plan.
Maintain processes to ensure that any person responsible for the plan’s governance activities takes adequate steps to identify, assess and manage climate-related risks and opportunities.

Strategy

On an ongoing basis, identify climate-related risks and opportunities that they consider will have an effect over the short, medium and long term on the plan’s investment and, for defined benefit plans, funding strategy.
Consider the impact on assets and liabilities of two scenarios under which global temperatures rise (one scenario must be consistent with 1.5 – 2 degrees Celsius warming).
Complete the analysis within the first year in which the regulations apply, and then every three years thereafter.

Metrics and targets

Select a minimum of three metrics, two of which are prescribed: one giving total greenhouse gas emissions attributable to the plan’s assets (“absolute emissions metric”), and one giving total greenhouse gas emissions per unit of currency (“emissions intensity metric”).
Set a target for at least one of the metrics, and subsequently measure performance relative to that target annually.

Employer implications

The new regulations aim to ensure that the largest pension plans reflect climate issues as part of the operation and strategy of managing their risks and opportunities. While we anticipate that the approach to addressing climate-related risks will be different across pension plans and is likely to evolve over time, we believe it is important that all plans with assets over 1 billion pounds take proportionate action now. Addressing the new requirements properly will take a considerable amount of effort, and there are benefits from a risk management perspective to not falling behind actions that others are taking, so it is important to start early. A full and deeper analysis of the new regulations is available in our recent Pensions Briefing article: Reporting pension scheme climate risks – what, how, when?

Contact

James Wintle

Managing Director, Retirement

email Email phone +44 1737 274209