Climate change risk – confirmation of the new functions of the pension plan trustee
The government issued a reply to its January 2021 consultation on new climate risk governance and reporting requirements that will apply to trustees of larger occupational pension plans from October 1, 2021. The government has also published the finalized regulations and the statutory guidelines that accompany them.
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 certain aspects of the requirements. Changes have also been made to the statutory guidelines to provide more clarity and support to Trustees.
What do the regulations require trustees to do?
The regulation obliges trustees to:
- Have a 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 monitoring of climate-related risks and opportunities that are relevant to their program.
- Establish and maintain processes for the purpose of ensuring that anyone who undertakes governance activities on their behalf, advises them on governance activities or assists them in governance activities, takes adequate measures to identify, assess and manage climate-related risks and opportunities that are relevant to the governance activities that the person undertakes, advises or assists.
- On an ongoing basis, identify and assess the impact of climate-related risks and opportunities that they believe will have a short, medium and long-term effect on their plan’s investment strategy and, where applicable, their plan’s investment strategy. funding.
- When possible, undertake a three-year scenario analysis that includes examining at least two scenarios where there is an increase in global average temperature. In the intervening years, trustees must consider whether circumstances require them to update their analysis. The first scenario analysis should be performed in the first year of the plan in which the plan is subject to governance and reporting requirements.
- Establish and maintain processes for identifying, assessing and managing climate-related risks that are relevant to their program. Trustees should ensure that climate risk management is integrated into the overall risk management of their plan.
- Select at least two emissions-based metrics and one additional climate-related metric. To the extent possible, administrators should obtain the data necessary to calculate the chosen parameters on an annual basis and use the parameters they have calculated to identify and assess the climate-related risks and opportunities that are relevant to the plan.
- Set a goal for their program against at least one of the metrics they have selected and, where possible, measure the performance of the program against the target (s) chosen each year.
- Within seven months of the end of each program year, publish a report (often referred to as a “TCFD report”) outlining various prescribed issues relating to the fiduciary climate risk governance, strategy and risk management processes. The report must be signed by the chairman of the board of directors and posted on a publicly accessible website accessible free of charge.
The obligation on trustees to do something “to the best of their ability” means that they must take all measures reasonable and proportionate to the circumstances having regard to (a) the costs, or likely costs, which will be incurred for steps, and (b) the amount of time that will need to be spent on those steps.
The pensions regulator will have the power to enforce compliance, including the ability to impose fines of up to £ 5,000 for an individual trustee and £ 50,000 for a corporate trustee.
What does the statutory directive say?
Trustees are required to take into account the statutory directives to comply with their governance and climate risk reporting requirements. It provides an overview of the requirements under the regulations and offers advice on what trustees must do to comply.
When will the requirements come into effect?
The requirements will apply to plans as follows:
- October 1, 2021 – occupational pension plans with relevant assets of £ 5 billion or more and authorized master trusts (regardless of asset level)1.
- October 1, 2022 – occupational pension plans with affected assets between £ 1 billion and £ 5 billion.
“Affected assets” means the net assets of the plan as recorded in the audited accounts for the plan year ending on or after March 1, 2020 (for the first tranche of the plans concerned) and March 1, 2021 ( for the second tranche of plans). Bulk annuity policies and certain other insurance policies are excluded from the calculation of relevant plan assets.
Where an occupational pension scheme has relevant assets of £ 1 billion or more for a scheme year ending on or after March 1, 2022, the scheme will become subject to the requirements from the scheme year that is. one plan year and one day after that plan year end date.
What should the trustees do now?
Administrators of plans that will be subject to the requirements this year should continue to work on arrangements to ensure compliance, while administrators of plans that will be subject to the requirements next year should start preparing now. . Trustees of other plans may wish to consider the extent to which they should voluntarily comply with some or all of the requirements as part of good plan governance.