Pension schemes in the UK still have a lot of work to do if they want to adapt to the challenges of climate change, according to a report from The Pensions Regulator (TPR).
TPR says that too few schemes take climate-related risks and opportunities into account, which means investment performance and saver outcomes may suffer. The new climate change adaption report outlines the climate change risks that are most relevant to occupational pension schemes and the approaches taken by TPR to address them.
According to a 2020 TPR survey, while schemes are more engaged, less than half of defined contribution schemes (43 per cent) took climate change into account when developing their investment strategies and approaches but 95 per cent of all members were in a scheme that did so.
TPR says this is because the vast majority of members are in master trusts, and 94 per cent of master trusts took climate change into account (compared with 70 per cent of large schemes, 49 per cent of medium schemes and 8 per cent of small and micro schemes used for automatic enrolment).
TPR adds that practices are rapidly evolving, and trustees and savers are becoming increasingly concerned about the need to consider climate-related risks and opportunities.
According to TPR, climate change risks include physical risks, transition risks, and litigation risks. Physical risks are the consequences of rising global average temperatures. Transition risks arise from the transition to a low-carbon economy, which is required to meet climate policy objectives, and litigation risks may arise when businesses and investors fail to account for climate change’s physical or transition risks.
TPR chief executive Charles Counsell says: “The pension industry still has much work to do to build resilience and assess climate-related risks and opportunities. A rapidly warming world brings the risk of more frequent fires, floods or extreme weather – potentially causing the loss of physical assets and supply chain disruption. Unless properly managed, these risks can potentially impact scheme funding, employer covenant and leave some savers facing a poorer retirement. Our adaptation report shows much more needs to be done.”
He adds: “Our report recognises that practices are evolving, and trustees – and savers – are more engaged with the need to consider climate risks. We remain convinced that a landscape of resilient pensions schemes that protect savings from climate risk is entirely within reach.”
Furthermore, according to TPR, trustees in schemes that incorporate climate change considerations into their investment and scheme governance may see a positive impact in expected returns and the ability to reduce risk. Opportunities to access new markets and technologies associated with the transition to a low-carbon economy, for example, may exist.
TPR says it expects to see improvements in data quality and modelling capabilities as the financial system moves toward mandatory reporting of climate-related risks and opportunities. But the industry has warned TPR’s supervision teams that the lack of climate-related data can be a significant issue for trustees and a barrier to developing plans to make schemes more resilient.
Dalriada Trustees professional trustee Jessie Wilson says: “TPR clearly recognise the systemic risks facing the pensions system posed by climate change, notably through scheme investments and potential threats to employer covenant. The publishing of the TPR’s Climate Change Strategy doubles down on the TPRs commitment to this area. They recognise a lot needs to be done, but the key message for trustees can be captured in one final extract from the TPR’s Climate Change Strategy: ‘Trustees must clearly evidence that words and intentions translate into action’.
“We agree, as meaningful change happens when we move from the talking stage to the implementation stage. Yet, we still believe Trustees decision making would be better assisted through improved carbon-related reporting from investment managers. We believe this should become increasingly standardised and readily available – something akin to the current approach to manager performance and risk data.
“We would also add that we recognise the need for simple, cost-effective regulations covering smaller schemes that do not have the governance budgets of the larger schemes.”
