The DWP has published a further consultation to mandate climate governance and risk reporting for large occupational schemes (assets of £1bn+) and all authorised master trusts in line with the international industry-led Task Force on Climate-related Financial Disclosures (TCFD).

It follows the consultation published prior to lockdown on “Aligning your pension scheme with the TCFD reccomendations”

The proposals, which apply to both DC and DB schemes, would require trustees to have effective governance, strategy, risk management and accompanying metrics and targets for the assessment and management of climate risks and opportunities, and to disclose these via an annual TCFD report.

This builds on last year’s Green Finance Strategy, which set an expectation that disclosures would be made in line with TCFD recommendations by large asset owners by 2022.

DWP say their objective in these proposals is to ensure trustees consider climate change and the likelihood that climate change is a financially material risk, as well as an opportunity, for pension schemes. Trustees have a fiduciary duty to act in the best financial interests of their scheme members. Given the likely material impact climate change presents, they think it is vital to accelerate pensions schemes’ governance considerations and disclosure on sustainability.

The DWP are at pains to point out that none of the proposed measures attempt to direct the trustees of pension schemes in their investment decisions.

“Government has no such powers and does not intend to seek them”.

The measures can only be used with a view to securing effective governance and disclosure by schemes with respect to the effects of climate change.

Velvet glove – iron fist

The consultation builds on considerable research carried out by the DWP and the private sector .

Collectively this research suggests that advised pension scheme trustees are
complying with the letter of the law but taking their time on making decisive
changes to strategy.

At a conceptual level large schemes are supportive. Hymans Robertson  found that 70% of trustees were supportive of the regulations, with 27% strongly supportive, while only 7% oppose them.

More difficulty has been found in the smallest defined contribution schemes.
TPR’s DC schemes survey, carried out ahead of the regulations coming into force, found that only 21% of schemes took climate change into account when formulating their investment strategies and approaches, with the most common reasons being that it’s “not relevant to our scheme” or that trustees were “not required to do this”.

TPR’s research suggests that non-compliance appear to be highest in the
smallest pension schemes and that as yet the TCFD recommendations  have not been adopted

The DWP see adoption as a fiduciary  duty and the document makes it clear that the law is on its side.

The same standards will be expected of trustees in relation to estimates and
disclosures about the effects of climate change, as are expected in relation to any
other estimates and disclosures that trustees make about their pension scheme.
Trustees are expected to comply with their existing duties under the Trust Deed
and Rules for the particular pension scheme, under general trust law and under
existing pensions legislation.

First and foremost, they must act in accordance with their fiduciary duties towards pension scheme beneficiaries. This means acting in their best interests and carrying out their duties prudently, conscientiously and with the utmost good faith and taking advice where specialist input is needed, for example about investment decisions and applicable legislation.

Who has to do what and when?

Armed with a strong legal case and the provisions of the Pension Schemes Bill, the DWP are proposing an aggressive timetable for adoption

Conclusion

The bulk of the paper deals with t minutiae through guidance and will no doubt make a number of consultants and lawyers a good living for some time to come.

But the bottom line is that the DWP seem in no move for diluting their ferocious determination to get compliance with the TCFD proposals.

It might be argued that small schemes are off the hook,  small schemes might argue that their days are numbered and the DWP are anticipating their demise.

Look out for some serious stuff in the Pension Regulator’s consolidation consultation response – due in September.

We cannot continue with the current tail of under-governed , under invested and under-performing small schemes for ever. By setting the bar at £1bn for a single employer occupational scheme and including all multi-employer trust based schemes – the DWP is making its intentions clear

It looks like “shape up or shape out” for trustees  and that can only be good news for members and for the planet.