LCP is urging trustees not to underestimate the challenges of climate change regulation, as a new survey from the pension consultants shows more than one in four DB schems are aiming for just “minimum compliance” with new rules.
LCP warns trustees of “turbulent waters ahead” as regulation on this issue evolves. Its annual “Chart Your Own Course” report looks at the experience of DB pension schemes over the past year via a market survey, and analysis from the data of schemes that LCP advises.
When asked about their approach to climate change regulations 29 per cent of schemes said minimum compliance was their aim, with only 5 per cent aiming to be “market leading”.
The LCP survey shows that while nearly 50 per cent of schemes already allow for climate change risks on the employer covenant, some 40 per cent do not, with the remainder believing it is not relevant for them.
These findings are despite the Pension Schemes Act bringing in specific requirements for larger schemes to enhance their climate governance.
Overall, the majority of schemes asked expected there to be little impact on the operation of their pension scheme across all the new requirements in the Pension Schemes Act.
LCP’s warning against complacency comes in light of the surprisingly benign impact that the pandemic has had on scheme funding. The typical scheme is around 5 per cent ahead in funding terms compared to pre-Covid levels. Whilst half of that comes from additional contributions, the overall improvement also reflects the robust risk management controls many schemes already had in place.
The report also found that 84 per cent of schemes now have a long-term funding target in place – up from around 75 per cent in last year’s survey, with 29 per cent expecting to achieve their target within five years.
Other key findings include:
- The majority of schemes surveyed said that the pandemic had had no impact or even a favourable one on all aspects of their scheme. A total of 29 per cent of DB schemes said there was a positive impact on funding and investments.
- Both interest rate and inflation hedging levels have increased over the year. The average levels for both are 82 per cent compared to pre—pandemic levels of 75 per cent for interest rate hedging and 71 per cent for inflation hedging.
- Around a third of schemes surveyed said that their number one priority for the year ahead was considering their long-term funding target framework, and around a fifth said it was to sort data and benefits including GMP.
- There is a continuing trend for using contingent funding: 44 per cent of schemes have some form of contingent funding in place already.
- Very few schemes have updated their mortality assumption in light of Covid-19, with 97 per cent of respondents maintaining their current assumption, at least for now.
LCP partner and co-author of the report Jill Ampleford says: “Our analysis reveals that many schemes are overwhelmed by the number of issues to consider over the coming year, particularly around data and governance. Trustees are having to work hard to think strategically and are focused on agreeing and maintaining a viable long-term funding plan.”
Mary Spencer, partner and co-author of the report, adds: “Pension schemes may be breathing a sigh of relief that they appear to be reaching safe harbour post pandemic. While the best prepared schemes are already on top of climate and regulatory risk there are some that are not. They can’t afford to ignore the potentially turbulent waters ahead if climate related risks aren’t put at the top of the agenda. Climate regulation is an accelerating force and pension schemes will be left behind the curve unless they make significant changes.”