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Incorporating Climate Change Strategy into Pension Savings

April 13, 2021

Establishing a healthy savings plans means staying aware of the context in which you are saving. As The Pensions Regulator (TPR) publishes a new climate change strategy calling on scheme trustees to act now and protect savers from climate risk, pension savers are set to enjoy even better outcomes – as long as trustees play their part.

Stepping Things Up

All schemes are already required to disclose their policies on environmental, social and governance considerations (including climate change) when they consider these financially material. Following the Pension Schemes Act 2021, these new proposals mean that larger schemes and all master trusts must make mandatory climate-related financial disclosures. They must then take any necessary action in line with the recommendations of the Taskforce on Climate Related Disclosures (TCFD).

The strategy calls on pension scheme trustees to invest in companies that protect savers from climate risk. As the TPR’s CEO states: “in a world where the climate emergency is real and urgent… any scheme that does not consider climate change is ignoring a major risk to pension savings and missing out on investment opportunities”.

Addressing Key Risks

With TPR already operating stringent rules regarding workplace pension schemes, the strategy takes things up a notch across the pension landscape. All scheme trustees will be expected to fulfill their fiduciary duty to address climate change risks . This includes publishing their statement of investment principles to ensure disclosures demonstrate compliance with the basics on climate change.

Climate change is a risk for schemes regardless of size and it is important for all schemes to make appropriate provisions at key decision-making level and conduct the appropriate staff training. TPR have stated clearly that they will take enforcement action against those trustees who do not comply and may even choose to publicise such cases.

With reforms all designed to support the UK’s transition to net-zero carbon emissions, TPR anticipates major pension savings by the end of 2023 in schemes reporting in line with the TCFD recommendations; current estimates suggest around 81% of memberships and 74% of occupational pension scheme assets.

Key figures across the pensions industry are praising TPR’s strategic and ambitious yet realistic approach where there is clear recognition that the “integration of covenant, actuarial and investment risk” is key to successful outcomes. By working with government departments and regulators, TPR is also offering trustees a streamlined approach to the changes, helping the whole process roll out more smoothly.

Prioritising Climate Change

TPR expects trustees to prioritise climate change but they must balance this with the personal wishes of their scheme members and consider the values of the end investor. The end goal is that these will essentially become one and the same; reducing financial risk and choosing effective investments can have a great positive impact on global CO2 emissions.

Great strides are being taken with regards to climate-related financial governance and investment decision-making, and TPR plans to publish further guidance later this year to support schemes in complying with the new legislation. Ultimately, climate change and associated risk will become a mainstay of good investment governance.

In the meantime, pension scheme trustees must trike to attain a strategic balance between best practice when it comes to climate change risk management with the individual investor ambitions, personal preferences and desired financial outcomes.

The Net-Zero Portfolio

Major UK schemes including NEST and the BT Pension Scheme have already announced their commitment to achieve net-zero carbon emissions from their portfolios by 2050, while TPR has made its own commitment to be net-zero by 2030. Trustees can both learn by example and utilise the incentives and tools provided via the strategy to effectively incorporate climate change considerations and risk into the building of portfolios and investment selection.

The regulator will also publish additional guidance to help schemes understand what they are looking for and how to take account of the impact of climate change in ‘integrated risk management’. Encouraging member engagement is a key part of the process, especially for helping smaller schemes engage with climate-related risk.

For advice and support with how to effectively fulfill the new requirements or any other aspect of pension scheme savings, governance and best practice, contact our team today,