DWP confirms climate risk governance and reporting changes for large schemes

The Department for Work and Pensions (DWP) has issued its response to last year’s Taking Action on Climate Risk consultation and published a new consultation on the draft regulations and statutory guidance to implement the requirements.

In its response, the DWP confirmed that, from 1 October 2021, occupational pension schemes with more than £5bn in assets and authorised mater trusts will need to have effective governance, strategy, risk management, and accompanying metrics and targets for the assessment and management of climate risks and opportunities in place.

Trustees of these schemes must meet climate governance requirements, publish a Taskforce on Climate-related Financial Disclosures (TCFD) report and include a link to the report in their annual report and accounts by the end of 2022.

The requirements outlined above will extend to schemes with more than £1bn in assets from October 2022 and the end of 2023 respectively.

The government had previously stated that it would review extending requirements to all schemes in 2024, but has now revealed it will conduct the review in 2023 for consultation in 2024.

In its new consultation, the DWP's proposed regulations will require trustees of relevant schemes to meet TCFD requirements and report on how they have done so.

A TCFD report publication deadline of seven months will apply for all relevant schemes from their respective scheme year end dates.

Trustees will need to undertake scenario analysis in the first year and every three years thereafter.

The website address of the published TCFD report must also be added to the annual funding statement for defined benefit (DB) schemes to make it more widely known to members.

“Climate change is a major systemic financial risk and threat to the long-term sustainability of UK private pensions,” commented Pensions Minister, Guy Opperman.

“With almost £2trn in assets under management, all pension schemes are exposed to climate-related risks and I am committed to ensuring trustees do everything they can to limit this risk to their members’ future retirement income.

“I acknowledge that for many trustees the proposals will be a new process and a learning curve, but mandatory TCFD-aligned disclosures will allow trustees to demonstrate better how consideration of climate-related risks and opportunities is integrated into their scheme’s entire governance and decision-making processes.”

The DWP plans to use the new climate risk powers outlined in the Pension Schemes Bill to make the regulations on which it is now consulting.

Non-statutory guidance for pension trustees to assist in aligning their schemes with TCFD recommendations and reporting on them has also been published.

It details how to integrate and disclose climate-related risks, and sets out a suggested approach for the integration and disclosure of climate risk within the typical governance and decision-making processes of pension trustee boards.

Commenting on the government’s consultation response, LCP head of responsible investment, Claire Jones, said: “The speed at which the government has developed its proposals to require large pension schemes to take action on climate change demonstrates that it is treating this systemic financial risk with the seriousness it deserves.
 
“The headline changes that DWP has made in response to last year’s consultation suggests that it has struck an appropriate balance between addressing the practical concerns that we and others had identified and setting suitably high expectations for trustees’ climate action. 
 
“For larger schemes, today’s publication is confirmation of what they knew was coming down the tracks: that by 1 October 2021 (or 1 October 2022 depending on their size), they will need to have a system in place to identify, assess and manage climate-related risks and opportunities and be preparing to publish annual TCFD reports. Although some of the technical details are still subject to consultation, there is now sufficient certainty that they can move ahead with confidence in getting ready to meet these new requirements.”
 
“Trustees of smaller schemes may think that today’s announcement doesn’t matter to them, but they would be mistaken. Whilst the new requirements do not yet apply to them, the government made it clear last August that all trustees are expected to take action to address climate risk – whatever their scheme size – in line with their fiduciary duties.

“The DWP had already said it would consider in 2024 whether to extend the requirements to smaller schemes and today it has brought forward that review to 2023. In the meantime trustees of smaller schemes can look to the requirements for large schemes as an indication of best practice on climate risk.”

The government's new consultation on the draft Occupational Pension Schemes (Climate Change Governance and Reporting) Regulations 2021, the draft Occupational Pension Schemes (Climate Change Governance and Reporting) (Miscellaneous Provisions and Amendments) Regulations 2021 and draft statutory guidance will close on 10 March 2021.

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