Pension schemes would be required to publish sustainable transition and DB schemes would be deterred from holding climate-harming assets long term by increasing liabilities for scheme sponsors under proposals published this week by the Financial Inclusion Centre (FIC).
The report, sponsored by the Friends Provident Foundation, calls for a radical shake-up of the UK pension sector, also calls for responsibility for prudential regulation of DB schemes to move to the Prudential Regulation Authority, as a response to the risk to the financial sector caused by the gilt market/LDI crisis.
The report, entitled: “Time for Action: The Devil is in the policy detail – Will financial regulation support a move to a net zero financial system?” includes a wide-ranging review of current regulations and new regulations and initiatives in the works.
Written and researched by the Financial Inclusion Centre’s directors Mick McAteer, a former non-exec director at the FCA and Robin Jarvis, professor of accounting and finance at Brunel University, it argues that the Pensions Regulator (TPR) should require DB schemes to put credible and demanding climate de-risking transition plans in place, with clear targets and timeframes.
DC pension scheme trustees should be required to produce climate de-risking transition plans, which, once determined, would be subject to approval by scheme members, it says.
The FCA’s fund labelling regime should also be applied to pension funds to enable better disclosure of how sustainable pension schemes are to members. As part of this investment products and funds marketed to trustees and pension funds should also be subject to the labelling regime which currently will only apply to the retail funds market. The FCA, working with TPR, would be responsible for this regime.
A new approach to both new flows of investment and current holdings should be applied to insurance companies, banks and subsequently defined benefit schemes.
A ‘One for One’ rule would require additional funds to be held for investments in and loans to companies involved in climate-damaging activities, and these would potentially be added to a scheme’s liabilities. For each £ of resource that finances new climate-damaging activities, a scheme should hold a £ of their own-funds to be held as liability for potential losses and then be applied to existing holdings, says the report.
The report also recommends that sustainability disclosures are strengthened and made binding for listed and large private companies, with the Financial Reporting Council (FRC) supervising the new regime and with auditors required to qualify accounts if they are not confident that the environmental disclosures are accurate and independently verified. The FRC should work with auditors and accountants to build the relevant skills sets for these professions.
The government and regulators should also create a Climate Harms Register for large companies and organisations with an associated register for financial services firms which would also provide more data and information for schemes, trustees and members.
Ratings agencies and providers would also be subject to statutory regulation from the FCA further improving the quality and confidence in the available data.
FIC director Mick McAteer says: “The pension sector is of huge significance when it come to driving the transition, but we believe that the Pensions Regulator and related regulators do not yet have the powers required to help the achieve the UK’s legally binding net zero goals. The current limited disclosure regime is simply not adequate. We need to see adjustments in capital requirements for DB schemes, and proper approved transition plans for both DB and DC schemes. An important detail is that we believe events in the gilt market and DB pension sector mean prudential regulation for a systemically critical sector should move to the Bank of England/PRA. Current plans are simply not adequate despite the fact that net zero is embedded in UK legislation.”
Professor Jarvis says: “We need a significant shift in terms of the disclosure requirements for companies as this data underpins decisions made by pension schemes, trustees and their advisers as well as for the broader financial sector. Supplying independently verified data to both DB and DC pension funds in company report and accounts rather than in the form of narratives will allow regulators to require much more from the pension sector and allow it to play a full role in the climate transition which, in turn, will allow the UK to meet the Paris targets.”