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A changing climate for pension trustees

Climate change will challenge every area of our lives, including our retirements. The pension industry’s response to that challenge will determine its future prosperity.

To keep temperature rises in line with international agreements, greenhouse gas emissions must fall sharply. This requires big changes in the global economy’s structure.

Pressure has been building for pension trustees to focus more on Environmental, Social and Governance factors (ESG) – and not just from Government or regulators. Savers increasingly want to know what’s being done with their money, including how their scheme trustees manage climate-related financial risks to their savings.

Climate change has the potential to have a big effect on scheme investments and sponsor covenants. It’ll also affect how TPR approaches meeting its statutory objectives. It’s directly relevant to our objective to protect member benefits. If trustees don’t consider climate change risks and opportunities or exercise effective stewardship, investment performance may suffer. This could mean savers missing out on better outcomes.

Pension Schemes Bill

Our increased focus comes as Government aims to ensure requirements for the effective governance of pension schemes with respect to the effects of climate change are written directly into pensions law.

The Pension Schemes Bill will enable regulations to be made requiring trustees to consider, in-depth, how climate change will affect their pension scheme and its investments and to publish information relating to the effects of climate change on the scheme.

Those asking if a scheme trustee’s plans stack up in the face of climate-related risks, should therefore have a place to find those answers.

The Bill is making its way through Parliament. But, trustees need to act now so they’re prepared for it coming into law.

Already trustees must produce a statement of investment principles (SIP) setting out their policies on financially material ESG considerations (including climate change) and their policies on stewardship – including when and how they plan to engage with investment issuers or managers on matters including risks and social and environmental impact. Trustees must also publish their SIP online.

From this year, trustees will have to make further changes. These include publishing an implementation statement describing whether certain policies in the scheme’s SIP have been followed, and the trustees’ voting behaviour.

An implementation statement may be used to show how trustees have held their investment managers to account, explaining how they have engaged with, influenced and challenged investment service providers where necessary. Trustees could also explain how they have embedded their principles in service agreements and checked these have been upheld.

This statement offers trustees the opportunity to demonstrate the work they are undertaking on members’ behalf, as well as reflecting on areas for improvement or change. It will have to be made publicly accessible and so savers will have the chance to examine how the intent stated by trustees in scheme policies translates into action.

Regulation

Climate change throws up tough and complex questions for trustees. Particularly, as they’ll depend on service providers for some of the answers when it comes to underlying data. However, trustees can have influence.

Applying pressure on investment managers to pay more attention to climate change in the building of portfolios and investment selection will drive those looking to attract investment to accelerate their plans.

There’s no stepping away from the questions raised by climate change. They’re integral to good scheme governance and can’t be ducked.

This is no passing fad. It’s fundamental, given the long-term nature of pension schemes climate change will be a fundamental consideration. Trustees must take account of long-term risks and opportunities to deliver the pensions people will need in the future. And that may be in an environment very different from today’s.

So, my advice to trustees? Build capacity in this area if you haven’t already. You’ll be better placed to understand what climate-related issues mean for your scheme – and better able to make decisions that contribute towards good savers outcomes.


By David Fairs, Executive Director of Regulatory Policy, Analysis and Advice

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