Industry welcomes LGPS climate proposals; timing and burden concerns raised

The pensions industry has broadly welcomed the government’s proposals to bring Local Government Pension Scheme (LGPS) administering authorities into the scope of the TaskForce on Climate-related Financial Disclosures (TCFD) reporting regime, although various concerns have been raised.

In response to the Department for Levelling Up, Housing and Communities' (DLUHC) consultation on requiring LGPS administering authorities to assess, manage and report on climate-related risks in line with TCFD recommendations, Redington welcomed the proposals but highlighted areas that should be clarified or reconsidered.

Redington head of LGPS, Jill Davys, noted the firm had some concerns with the proposed requirements on scenario analysis.

“In our experience working with corporate schemes, we have seen scenario analysis provide limited insight into risk identification at a strategic level, and for many it has now become a tick-box exercise,” she stated.

“Requiring all administering authorities to undertake complex analysis with a limited track record of providing insight is potentially burdensome.

“Similarly, when it comes to reporting, we have urged that the proposed requirement to produce an annual report should not be so burdensome as to prevent effective action taking place by key decision makers.

“The report-writing process can require significant resources and expense to complete, and while this should reduce over time, it may be more appropriate for smaller administering authorities to report less frequently, or be able to refer to pool company, asset manager, or adviser reports for substantive content.”

Redington also suggested that the proposed statutory guidance should be flexible, principles-driven, and updated over time to reflect the evolving landscape and to draw on established good practice.

“Ultimately, we believe that all these requirements should be underpinned by the principles of simplicity, flexibility, and proportionality,” said Davys.

“Climate risk management is a complex area – good practice is still nascent; some administering authorities are better resourced than others to respond; and UK asset owners are among the first to have to publish regulatory climate disclosures.”

The Society of Pension Professionals (SPP) also welcomed the consultation, but warned that it had some concerns about the timing of new requirements, particularly as LGPS funds will be required to meet the new requirements in 2023/24.

“This will be challenging given the delay with guidance and the draft regulations which have not been published alongside the consultation,” its response stated.

“Without sight of these documents, it is difficult to fully consider the consultation. In order to meet these timescales, the regulations will need to be at least finalised in advance of 1 April 2023.

“With no current draft in place, this seems challenging. Without regulation, any requests for data would be both uncertain and non-statutory in nature. There is a danger that the data required will not be available in time.”

Furthermore, the SPP noted that while managers and pools may support LGPS funds with their climate risk reporting, some of the smaller LGPS funds may struggle to obtain resources to provide the required disclosures.

“LGPS funds already have significant demands on their resources and need regulatory certainty as well as time to implement new requirements,” it continued.

“Not only that, but from our knowledge of implementing the TCFD requirements in the private sector, we are aware that there may be a significant cost to this potential increased governance requirement.”

In its response to the consultation, Cardano restated its recommendations that it made in its response to the TCFD consultation for private schemes.

Namely, it recommended a framework that pooled resources to produce commonly accepted views, and that provided clear guidance on acceptable parameters that can be used in climate risk assessments.

“We also reiterate the importance of assessing the climate risks affecting funding strategies, and not just investment, given the long-term nature of the LGPS, which will result in more exposure to the extensive timeframes over which catastrophic climate events are expected to occur,” Cardano stated.

“Understanding funding strategy exposure is therefore potentially even more important for LGPS than for private schemes. As such, analysing scenarios where private entities may be less able to support ongoing funding and using this to develop contingency and early engagement plans is likely to enhance the security of members benefits.”

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