The UK government has published a response to its January 2021 consultation on the new climate risk-related governance and reporting requirements that will apply to trustees of larger occupational pension schemes from 1 October 2021. The government has also published the finalised regulations and accompanying statutory guidance.
The requirements under the regulations are essentially unchanged from the consultation version – the changes that have been made are largely technical and are designed to clarify aspects of the requirements. Changes have also been made to the statutory guidance to provide further clarity and support for trustees.
Continue reading for our discussion on the governance and reporting requirements.
What do the regulations require trustees to do?
The regulations require trustees to:
- Have knowledge and understanding of the principles relating to the identification, assessment and management of climate-related risks and opportunities affecting occupational pension schemes.
- Establish and maintain oversight of the climate-related risks and opportunities which are relevant to their scheme.
- Establish and maintain processes for the purpose of satisfying themselves that anyone who undertakes governance activities on their behalf, advises them on governance activities, or assists them with governance activities, takes adequate steps to identify, assess and manage any climate-related risks and opportunities which are relevant to the governance activities that the person is undertaking, advising on or assisting with.
- 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.
- As far as they are able, undertake triennial scenario analysis which includes considering at least two scenarios where there is an increase in the global average temperature. In the intervening years, trustees must review whether circumstances require them to refresh their analysis. The first scenario analysis must be carried out in the first scheme year in which the scheme is subject to the governance and reporting requirements.
- Establish and maintain processes for identifying, assessing and managing climate-related risks which are relevant to their scheme. Trustees must ensure that management of climate-related risks is integrated into their scheme’s overall risk management.
- Select a minimum of two emissions-based metrics and one additional climate-related metric. As far as they are able, trustees must obtain the data required to calculate their chosen metrics on an annual basis and use the metrics they have calculated to identify and assess the climate-related risks and opportunities which are relevant to the scheme.
- Set a target for their scheme in relation to at least one of the metrics which they have selected, and, as far as they are able, measure the scheme’s performance against the chosen target(s) annually.
- Within seven months of the end of each scheme year, publish a report (often referred to as a “TCFD report”) setting out various prescribed matters relating to the trustees’ climate risk-related governance, strategy and risk management processes. The report must be signed by the trustee chair and published on a publicly available website which is accessible free of charge.
The requirement for trustees to do something “as far as they are able” means that they should take all steps that are reasonable and proportionate in the circumstances taking into account (a) the costs, or likely costs, which will be incurred in taking those steps, and (b) the time which will be required to be spent in taking those steps.
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.
What does the statutory guidance say?
Trustees are required to have regard to the statutory guidance in complying with their climate risk-related governance and reporting requirements. It provides an overview of the requirements under the regulations and offers guidance on what trustees should do in order to comply with them.
When will the requirements come into force?
The requirements will apply to schemes as follows:
- 1 October 2021 – occupational pension schemes with relevant assets of £5 billion or more and authorised master trusts (regardless of their asset level)1.
- 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.
Where an occupational pension scheme has relevant assets of £1 billion or more for a scheme year ending on or after 1 March 2022, the scheme will become subject to the requirements from the scheme year that is one scheme year and a day after that scheme year end date.
What should trustees do now?
Trustees of schemes that will be subject to the requirements this year should continue to work towards establishing arrangements to ensure compliance, while trustees of schemes that will be subject to the requirements next year should start making preparations now. Trustees of other schemes may wish to consider the extent to which they should voluntarily comply with some or all of the requirements as a matter of good scheme governance.