I suspect when we look back at significant events in 2020, pension folk will consider yesterday’s consultation from the DWP;-
Taking action on climate risk: improving governance and reporting by occupational pension schemes
as another small step in the upheaval in the way our pension savings are invested. The consultation covers both those investments that back the promises made by our employers and those that directly impact the money we get later in life. The guidance in the consultation does not yet cover the default investments made by insurers offering contract based workplace pensions nor the fund selections made by SIPP platforms. But we can reasonably assume that TPR is moving in lockstep on this, as it is on matters such as Value For Money.
When the Pension Schemes Bill becomes an Act (we hope in September) it will become compulsory for certain trustees to demonstrate governance and reporting aligned to the recommendations of the international industry-led Task Force on Climate-related Financial Disclosures (TCFD).
This will mean changes to the strategy and risk management of the money which one day be spent by us and the intention is that it is invested for the good of the world in which the money is spent. This is about very real things. It’s about calculating the ‘carbon footprint’ of pension schemes and assessing how the value of the schemes’ assets or liabilities would be affected by different temperature rise scenarios, including the ambitions on limiting the global average temperature rise set out in the Paris Agreement.
It’s about changing the way our pensions work, not just for our benefit but for those of a future world.
Improving the value of our money
Currently we conducted an analysis of the returns that savers are getting on various default strategies employed by workplace pensions, both contract based and occupational. The analysis will be carried out while AgeWage is in the FCA sandbox and will include data submitted voluntarily by our 300 testers (thanks to you).
The bulk of the data (the big data) will come from large DC schemes of the type covered by this consultation. The early signs suggest that since their introduction, funds managed with regard to the environment, good governance and social purpose have delivered better outcomes than those that haven’t bothered.
Currently the benchmark index for measuring the value for saver’s money is set to “not bothered”.
as a stakeholder in the development of this index, we have- following the publication of the DWP consultation, asked Morningstar to review the rules of the index so that it does in future incorporate ESG criteria. The means to do this are simple enough as Morningstar has created comparable measurement of performance based on ESG and non ESC management criteria.
We are keen that Government policy influences that part of the pension eco-system AgeWage has some influence on. Though this is a small part, we think change needs to happen from the bottom up as well as the top down
The average UK pension pot will – we expect – reflect the impact of ESG and I am happy to say that early work of our analysis suggests that the prospects for British pension savers look better for the changes proposed in this consultation.
Making our money matter
The money we save into workplace pensions is not a tax or even a payment of national insurance. It is a payment to our future selves in a future world. It is an investment in our future so making this money matter is critically important.
Those trustees and those charged with watching over our personal pensions are now protected by the law in exercising the recommendations of the TCFD. Things will no doubt go wrong for ESG funds, there may be failures in the application of ESG principles in the investment of a fund and underlying assets may fail for reasons outside the ESG framework. This is to be expected and we can also expect, when failures happen , that there will be people who call into question the management of money this way.
But we live in a parliamentary democracy that has and is debating the adoption of TCFD disclosures by our pension schemes. Assuming the Pension Schemes Bill is enacted, the law will protect those who follow the TCFD disclosures and the detailed guidance in this consultation. The law will impose penalties on those who don’t.
The maximum fine for a penalty issued for the breach of any of the requirements proposed in this consultation would not exceed £5,000 for an individual trustee, or £50,000 for a corporate trustee
I expect that those few remaining trustees and members of IGCs and GAAs who are in denial of the value of ESG, will – in the face of the forthcoming Act and the detail within the consultation, step down.
The world is moving against them and if you read the consultation you will understand why.