The Department of Work and Pension will launch two new working groups to look at improving stewardship within the DC pensions sector.
DWP head of climate change and responsible investment policy David Farrar told delegates at the Corporate Adviser’s virtual Master Trust and GPP summit that there were structural reasons why there has been a focus within the DC sector on addressing climate risk management through investment strategy rather than stewardship.
The working groups, one of which will look at the barriers to voting in pooled arrangements, will aim to look at what steps might be taken to improve this.
Farrar also blew cold water on suggests that the government may compel pension schemes to invest in UK infrastructure as part of a post-Covid recovery plan. He says: “There are absolutely no indications to suggest that this is the direction of travel.”
Farrar outlined the main actions being taken by the government to ensure pension schemes manage climate change risks. This stresses that scheme and trustees have a fiduciary duty to take into account financially material risks and opportunities on behalf of members.
Farrar says he wanted to stress that this did not mean the DWP was mandating schemes to set net zero targets, divest from high carbon assets or compel trustees to ensure investment strategies follow member principles, which he pointed out may not always align.
He says the focus of this government action is reflected in the Pensions Scheme Bill which was debated in Parliament last night.
He says: “The government view is not to rip everything up and stat again but to work with the current fiduciary duties we have, that trustees and governance committee must take account of financially material risks and opportunities.”
He says there was evidence that some schemes had not previously considered climate risk as a financially material risk which is why the legislation had been introduced.
Farrar says that he thinks in the short term this risk management approach may be sufficient to help address wider issues of climate change. And he says claims by campaign groups that climate change can’t be addressed without pension scheme investing for impact were “fallacious”.
He says there was evidence of more co-ordinated global action from government to address this issue and move towards low emissions, with China setting a net zero target and the recent election results in the US, which will see the country sign up again to the Paris Agreement. This he said would make climate risk management by pension scheme more efficient.
Farrar added that he did not think it was necessary for schemes to engage members on this issue. He pointed out that while there were many surveys that indicated people want their pension to invest more sustainably many of these suffered from ‘social desireability bias’.
“If you look at the evidence it is clear that people give the answer they think the questioner wants or expects, or give an answer that helps make them feel better. It is important to counter-point these with the evidence of what people actually do when it comes to making decisions about pensions and investment.” He says evidence suggests that around 97 per cent of people make no choice at all as to where their pension is invested.
