Aligning your pension scheme with the TCFD recommendations

10th February, 2021

  • “Together, we can build a better, safer and greener pensions system”

    The DWP has published a guide on aligning pension schemes with the Taskforce on Climate-Related Financial Disclosures (TCFD) recommendations . At the same time, it is consulting on proposals requiring schemes to address climate change risks . Collectively, the publications run to nearly 400 pages (including some ‘quick start guides’ and an impact assessment)! So, not a light read but, with trustees’ duties about to be extended under the Pension Schemes Act 2021 and climate change set to be a ‘hot’ (excuse the pun) topic for years to come, it is a very important one.

    In summary, the guide, produced by the Pensions Climate Risk Industry Group (PCRIG), aims to help trustees evaluate the way in which climate-related risks and opportunities may affect their strategies. In four parts, it sets out non-statutory guidance for the trustees of occupational pension schemes on assessing, managing and reporting climate-related risks in line with the TCFD recommendations.

    The accompanying consultation seeks views on proposals to require trustees of larger occupational pension schemes and authorised schemes to address climate change risks and opportunities. It includes the Government’s response to the earlier consultation ‘Taking Action on Climate Risk: Improving Governance and Reporting by Occupational Pension Schemes’, and it seeks views (by 10 March 2021) on both the draft legislation that would enact the Government’s policy proposals and the draft statutory guidance.

    In a speech delivered by Guy Opperman, the Minister for Pensions, to the 2021 Professional Pensions Investment Conference about climate-related risks, Mr Opperman launched the consultation and observed that: “The UK is set to become the first major economy to require climate risks to be specifically considered and then reported on by pension schemes” and “The new measures will ensure trustees are legally required to assess and report on the financial risks of climate change within their portfolios”. He concluded his speech by adding “Together, we can build a better, safer and greener pensions system”.

    The consultation

    The consultation, itself, is over 100 pages long. However, there is a useful summary table of the proposed policy, scope and timeline. For example, for schemes coming into scope on a threshold test.

    The condition

    Governance requirement

    Disclosure Requirements

    Disclosure Requirements

    If

    Trustees must meet the climate governance requirements for

    Trustees must publish a TCFD report

    Trustees must include a link to the report in

    On 1st scheme year to end on or after 1 March 2020:

    the scheme relevant assets ≥ £5 billion.

    Current scheme year from 1 October 2021* to end of that scheme year.

    And

    [unless scheme’s relevant assets are < £500 million] on the scheme year end date

    Next full scheme year to begin after 1 October 2021 to end of that scheme year

    and so on.

    Within 7 months of the end of the scheme year which is underway on 1 October 2021†

    and

    Within 7 months of the end of the next scheme year to begin after 1 October 2021†

    and so on.

    The Annual Report and Accounts produced for that scheme year.

    On 1st scheme year to end on or after 1 March 2021:

    the scheme has relevant assets ≥ £1 billion

    Current scheme year from 1 October 2022* to end of that scheme year

    and so on.

    Within 7 months of end of that scheme year which is underway on 1 October 2022†

    and so on.

    The Annual Report and Accounts produced for that scheme year.

    From any scheme year end date to fall on or after 1 March 2022

    the scheme has relevant assets ≥ £1 billion.

    The beginning of the scheme year which is one scheme year and a day after that scheme year end date.

    Within 7 months of end of that scheme year.†

    The Annual Report and Accounts produced for that scheme year.

    Trustees of occupational pension schemes must have regard to accompanying statutory guidance when meeting requirements under the Regulations. And, as with most pension regulations, there will be penalties for non-compliance.

    The TCFD recommendations

    The TCFD recommendations are structured around four thematic areas that represent core elements of how organisations operate. According to the PCRIG guide, these might be considered to apply to pension trustees (as asset owners) as follows:

    The four core elements of the TCFD recommendations are then supported by eleven recommended disclosures.

    • Part 1 of the PCRIG guide covers: the financial risk of climate change; types of climate risk; legal requirements on trustees to consider climate-related risks and opportunities; and the TCFD recommendations.
    • Part 2 includes setting investment beliefs; considering climate risks in setting investment strategies, reviewing and reporting; stewardship; additional points to consider for DB schemes (including Integrated Risk Management (IRM) and scenario testing); method of reporting and member communications; and top 10 questions for asset managers. Helpfully, given its length, this part of the guide includes summary tables showing suggested actions and disclosures.
    • Part 3 on ‘scenario analysis’ covers expectations of trustees; choice of approach; considerations for different scheme sizes and types; which scenarios trustees should use; interpreting and using the results; and reporting the analysis. There is also a case study.
    • Part 4 – ‘setting metrics and targets to measure and manage climate-related risk’ – comments on the role of metrics; availability of data; selecting metrics; and targets. Again, a case study is included.

    Next steps for trustees

    The consultation period is very short and material changes to the proposals are not expected. Also, the measures will, at least for the biggest schemes, be implemented quickly.

    So, trustees and their advisers should be considering the impact on their schemes now; in particular:

    • Is the scheme in scope and, if so, when?
    • Do the scheme trustees need training?
    • What data will be needed?
    • How will investment strategies, processes, monitoring and reporting change?
    • What steps need to be taken to align with the TCFD recommendations?
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    • Published byJohn Wilson

      John is Head of Technical, Research and Policy with over 33 years’ experience in employee benefits knowledge management He joined Dalriada in December 2019. Previously he was Head of Technical at JLT Employee Benefits for 20 years and pensions technical roles at...

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