The Pensions Regulator (TPR) is urging trustees of pension funds to make sure they are prepared for changes to climate reporting regulations coming into force tomorrow (1 October), as it published updated guidance.
The amended regulations require affected trustees to calculate and report on a portfolio alignment metric. This is a metric that gives the alignment of the scheme’s assets with the Paris Agreement goal of limiting global warming to 1.5°C above pre-industrial levels.
David Fairs, TPR’s executive director of regulatory policy, analysis and advice, said: “Climate change and the transition to net zero has the potential to cause material financial consequences for pensions schemes and, ultimately, savers’ retirements.
“Trustees are not being asked to take action to stop climate change, but they must be ready to protect savers’ pensions from the material financial risks it poses, and to take advantage of opportunities from a global pivot towards low carbon economies.”
He added that this new metric should help trustees and their members understand and quantify potential risks to scheme investments arising from government actions taken to meet Paris Agreement goals.
“Trustees are being asked to calculate and use this new metric ‘as far as they are able’, which recognises that there may be limits to available data. However, trustees should explain the reasons for any data gaps in the report and set out a plan for improvement,” Fairs noted.
As the investment industry adapts to the new data capture and reporting requirements, more information should become available over time, he added.
“While trustees do not need to be climate change experts, they should have sufficient knowledge and understanding to be able to identify, assess and manage climate-related risks and opportunities for their scheme,” he said.
The regulations – the Occupational Pension Schemes (Climate Change Governance and Reporting) Regulations 2021 and the Occupational Pension Schemes (Climate Change Governance and Reporting) (Miscellaneous Provisions and Amendments) Regulations 2021 – had a phased introduction, initially applying to trustees of authorised master trusts and of larger schemes with net relevant assets of £5bn or more from 1 October 2021.
However, from 1 October 2022, the rules will also apply to trustees of schemes with net relevant assets of £1bn or more. The Department for Work and Pensions intends to consider whether to extend these rules to smaller schemes in 2023.
Work and Pensions Committee recommends auto-enrolment reform
The Work and Pensions Committee is calling for a review of the automatic enrolment system as today published its report Protecting pension savers – five years on from the pension freedoms: Saving for later life – following an inquiry into protection pension savers, five years on from pension freedoms.
The report noted that many are not saving enough for an ‘adequate’ income in retirement and that there are people not within the scope of auto-enrolment due to low pay or because they are self-employed who would benefit from saving in a pension.
Although there are two commonly-used measures of adequacy – the Pensions Commission’s target replacement rates and the Pension and Lifetime Savings Association’s (PLSA) retirement living standards – there is no consensus on a single definition or on what outcomes the pensions system should be designed to achieve.
“Achieving a new consensus is essential to gaining support for reforms needed to address the problem. We are calling on the government to set out its plans for this by March 2023,” the committee wrote in the report.
Phil Brown, director of policy at B&CE, provider of The People’s Pension, said: “We welcome the publication of the findings by the Work and Pensions Select Committee, which we hope the government will act upon. It’s pleasing to see that the committee agrees that a consensus is needed from decision makers and the industry before the serious issue of poor pensions savings adequacy is tackled.”
he added that while auto-enrolment has achieved much in its first 10 years, research that B&CE submitted to the committee’s inquiry shows that the majority of people are not saving enough for their retirement.
“While navigating a way out of the cost-of-living crisis has to be the priority for government, the potential for a pensions crisis affecting millions of people cannot be ignored,” he added.
Nigel Peaple, director of policy and advocacy at PLSA, said: “We agree with the Committee’s stark assessment that without government action too many people will fail to achieve an acceptable standard of living in retirement. This is something that is true for people on average earnings, as well as for under-pensioned groups, such as people – often women – who take time out of work to care for others, and specific elements of the workforce such as the self-employed, gig-economy workers and people with part-time jobs.”
He added: “Recognising that policy interventions must balance the current cost-of-living crisis with preventing millions of people falling short in retirement over the coming decades, the PLSA strongly believes that reform is needed, but it should be only gradually introduced from the mid-2020s and over the decade that follows.”