Earlier this week the PLSA attacked an amendment to the Pension Schemes Bill requiring large pension schemes to be compelled to report on their climate change strategies as a dangerous assault on trustees’ fiduciary duty.
The House of Lords amendment, which will be the subject of a DWP consultation, was described by PLSA Head of DB, LGPS and standards Joe Dabrowski as “giving unprecedented new powers to Government bodies to interfere and request changes to private sector schemes’ investment strategies”.
But DWP sources close to Corporate Adviser have indicated that schemes will be required to disclose their climate risk in line with the recommendations of the TCFD. It is also understood that this only expected to apply to large pension schemes at the outset. DWP is understood to have no desire to direct pension scheme investment, and believes the investment as written does not allow it to.
So does the amendment mark a crossing of a line that has historically excluded government from directing how trustees invest money on behalf of their members?
The proposed amendment says: “Regulations may impose requirements on the trustees or managers of an occupational pension scheme of a prescribed description with a view to securing that there is effective governance of the scheme with respect to the effects of climate change.”
The amendment then goes on to describe these requirements as reviewing the exposure of the scheme to risks, assessing the assets of the scheme in a prescribed manner, determining, reviewing and if necessary revising a strategy for managing the scheme’s exposure to risks of a prescribed description and determining, reviewing and – if necessary – revising targets.
Schemes could then be required to measure performance against these targets and prepare documents containing prescribed description.
Hymans Robertson head of responsible investment Simon Jones says: “This proposed amendment to the Pensions Bill in the House of Lords which would significantly increase the climate risk disclosure requirements for pension scheme, will come as a surprise to many in the pensions industry as it pre-empts guidance which is expected to be released shortly.”
While the amendment clearly increases potential disclosure requirements, and arguably enables the government to require schemes to adopt specific processes for assessing risks, it does not appear to permit DWP to impose specific targets or strategies. Instead Section 41A only facilitates requirements that secure effective governance in relation to the effects of climate change, according to DWP sources. The DWP is understood to think Section 41A of the legislation is needed to require schemes to do the preparatory work to disclose their consideration of climate risk, because Section 41B – the publication power – is not sufficient by itself to get schemes to make TCFD disclosures.
Jones says: “The proposal comes after an announcement last week that the government would bring forward the ban on sales of new petrol, diesel and hybrid cars and is a further indication that the government is not afraid to drive positive action on climate change through policy change. We suspect this is the beginning of a raft of policy responses which will be needed to tackle the climate crisis.
“Pension schemes will need time to understand the new reporting requirements and take steps to adapt their strategies, reporting and governance so that they comply. We are concerned about introducing more onerous disclosure requirements which may not deliver any real change in trustee behaviour and risks becoming another box-ticking exercise.
“We urge the pensions industry as a whole to take meaningful action to reduce climate risk. This will not only deliver better outcomes for pension scheme members but will have knock on benefits for the UK as a whole on our journey to carbon neutral.”