Earlier this month, UKSIF published what is looking a very influential report on how trust based DC schemes are facing up to the issues of climate change and wider ESG considerations.
It didn’t mince its words
Pension scheme trustees’ policies on ESG factors like climate change are vague and non-committal, and many have not even published their policies – despite their legal obligation to do so
Our findings indicate large scale non-compliance among trustees, who have mostly failed to publish their SIPs as the ESG regulations require.
Our findings indicate that two thirds of trustees have not complied with the requirement to publish their policies. Among those who have published their SIPs, policies are mostly vague and trustees commit to few concrete actions.
However, some schemes are starting to think more carefully about ESG policies, and a few leaders have devoted time and resource to developing a sophisticated understanding of financially material ESG risks.
The Pensions Regulator (TPR) must urgently conduct a thematic review, investigating the state of compliance with the regulations, and the government should look at a new way of ensuring the publication of schemes’ policies to help smaller schemes overcome the practical difficulties.
From 1st October 2020, trustees will have to publish statements detailing how they have implemented the policies in their SIP. TPR should issue guidance requesting that trustees report on what specific actions have taken place to implement their policies. We believe one of the most effective things trustees can do is to incorporate ESG considerations into the selection and retention of investment managers, but trustees need good advice to do this.
TPR can help them do this by giving them advice and guidance when tendering for advisers. TPR should also provide more guidance to trustees on how they can interrogate their investment manager’s approach to ESG issues…
The report goes on to detail exactly what Trustees can do.
DWP follows up
Close on the heals of the publication of this report, the DWP amended the Pension Schemes Bill to allow tPR to do what UKSIF were asking for. Its Director Pete Searle wrote to tPR’s CEO asking for the adaptation report tPR was producing for DEFRA to cover the following points
- financial risks and opportunities from climate change that impact the Regulator and trust-based occupational pension schemes
- how the Regulator and those running pension schemes are responding to and managing the financial risks and opportunities associated with climate change
- the Regulator’s policy and regulatory approach to adapting to climate change
The letter was published on the Government website – a clear hint to tPR that the DWP and its pension minister meant business.
TPR responded with the two fingered salute
TPR’s CEO has now written back as follows (and has published the letter).
We will contact schemes where there are failings and this is the approach we may take in the light of the UKSIF report1. and we will consider enforcement action where appropriate2. Where schemes appear unwilling or unable to comply with these types of governance requirements we will encourage3 them to consolidate into larger schemes such as master trusts, where governance will be more effective.”
- “this is the approach we may take …” do tPR think it’s down to them which breaches they follow up? This suggests that trustees are best keeping their heads down and doing nothing.
- “we will consider enforcement action where appropriate” why might tPR consider enforcement action inappropriate?
- “We will encourage them to consolidate into larger schemes such as master trusts”. So what happens if trustees in breach choose to carry on regardless. What power has the Pensions Regulator got left? Where does this leave DB schemes who don’t have the same consolidation opportunities?
This paragraph says two things to me
- TPR are saying this Pension Schemes Bill amendment will only apply to DC. Presumably it is worried about the impact of activism against investments with high carbon footprints (which may tip the schemes of the likes of Shell and Centrica into the PPF). I suspect “employer covenant issues are rather more important to tPR than the state of the planet.
- TPR are saying that they’d like to take a “Sergeant Wilson” approach to DC, implicitly blaming those further up the line while giving the troops every opportunity to do nothing.
What will DWP do next?
I don’t expect DWP , let alone the Pensions Minister, to take this snub well. For all the placatory language of Charles Counsell’s letter, tPR are quite blatantly failing to toe the party line.
While tPR accept the DWP’s request to incorporate DWP’s suggestions into its adaptation report, it makes it clear it is going to the PLSA’s annual conference with an ear out for what large schemes will say about the amendment.
Consultation on the guidance led by DWP, which is based on the framework of the Taskforce on Climate-related Financial Disclosures (TCFD), will clearly be critical given the tabled amendment to make disclosure mandatory for larger pension schemes.
TPR and PLSA to act against the Government?
I get the feeling that the forthcoming consultation on just how far tPR goes in the monitoring of pension trustees around ESG, is going to be fiery.
It looks to me that tPR is siding with schemes against rigorous enforcement and cosying up to tPR for a bit of shelter.
If I was Guy Opperman I would be absolutely livid and I’d telling Charles Counsell and David Fairs this is simply not good enough. The recent decision of the Government not to pursue the third Heathrow runway is an ominous portent for tPR as to how this might turn out if Guy Opperman escalates.
One way or another the PLSA’s investment conference is likely to be a lively affair and I’m taking a couple of days off from AgeWage to report on it! I’ll keep you posted.
Further stuff on this…
You can read more about the reaction of UKSIF to tPR’s dilatory response in the FT. Thanks to Angus Peters for doing the reporting and confirming the positions of the key players in this debate.
For those who are interested in the views of ordinary people, I’d suggest you lobby the PLSA to ensure that it’s proposed “innovative” consultation on this issue includes survey’s of the views of savers and pensioners in the schemes that form its membership. More on my blog here