Warnings, further requests formulated over trustee climate risk duties

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Further pensions industry requests have been formulated of the UK government due to residual concerns about its proposals for climate risk reporting and governance requirements for occupational pension funds.

This is according to feedback to a Department for Work and Pensions (DWP) consultation on draft regulations and statutory guidance, which it developed taking into account responses to its initial proposals on the topic in August last year.

Specific requests include that the DWP work with the financial markets regulator to ensure that “relevant levels of skills and climate knowledge are part of the authorisation regime for investment consultants and managers” – a point made by the Pensions & Lifetime Savings Association (PLSA) in its response to the consultation.

Overall the association said that although there had been progress since the DWP’s previous consultation on the proposed requirements, which draw on the Taskforce for Climate-related Financial Disclosures (TCFD) recommendations, it continued to have concerns about the “lack of existing infrastructure to support pension schemes’ reporting requirements”.

“At the time of writing, though the government has published a roadmap to TCFD, it remains the case that only premium listed companies and pension funds are either required to publish, or are subject to a timetable that will require it,” the PLSA noted.

Joe Dabrowski, deputy director for policy at the PLSA, said it was important that the pensions regulator adopt a flexible approach to the requirements “until such time as greater clarity on data standards and definitions is achieved and until government has set clear TCFD reporting obligations on investment managers and intermediaries”.

The Financial Conduct Authority has previously said it would be “mindful” of pension schemes’ information needs when it develops climate-related disclosure requirements for asset managers, indicating a possible consultation in the first half of this year.

‘Spurious’ data gathering, calculations

In its feedback on the DWP consultation, the Association of Consulting Actuaries (ACA), like the PLSA, welcomed the government having specified that many of the provisions would apply to trustees “as far as they are able” to meet them.

However, it warned there remained a risk of “spurious data gathering and calculations” and expressed concern of a “herd mentality” when it came to metrics and targets.

Stewart Hastie, chair of the ACA’s climate risk group, told IPE the association was trying to convey the message that it was important not to lose sight of the bigger picture, and that requiring excessive analysis could be a drain on resources rather than changing behaviour.

Separately, the ACA had a suggestion for taking advantage of what it said was “a major opportunity” to engage scheme members with their pensions savings.

“We suggest the inclusion of additional, non-statutory ‘best practice’, guidance on how schemes could provide simplified but engaging information to members off the back of TCFD reporting to engage members in their benefits and climate change issues,” said Hastie.

“The impact assessment does not reflect the outlay schemes will face in the first year of compliance”

Carolyn Schuster-Woldan, managing director in the investment consulting team

At Redington, Carolyn Schuster-Woldan, managing director in Redington’s investment consulting team, honed in on costs, saying that the overall burden for pension schemes reporting in line with the TCFD was still underestimated despite the costs estimated in the DWP’s impact assessment being more “realistic” than those presented in its August consultation.

“Though we broadly agree with the breakdowns for familiarisation, scenario analysis, metrics and producing the report, the impact assessment does not reflect the outlay schemes will face in the first year of compliance,” she said.

“We must be mindful that most pension schemes won’t have the required governance, strategy and risk management processes in place at present and, while fiduciary duty requirements means schemes are taking climate change into account as a material risk, the processes required as per the regulations are very specific and will see most schemes having to establish new processes.”

She said Redington would urge the DWP to carry out a survey after the first year of regulatory compliance, asking what the actual costs had been in terms of additional trustee, in-house, consultant and asset manager time and resource.

Schuster-Woldan also expressed a recommendation for a refinement of the non-statutory guidance, suggested greater weighting be given to promoting industry collaboration as best practice.

“Our own experience with initiatives such as the Investment Consultants Sustainability Working Group has reaffirmed our belief that the regulator should, wherever possible, endorse a collective responsibility for continuous improvement by the industry,” she said.