Pension schemes’ future climate risk reporting costs ‘underestimated’

The overall cost burden pension schemes will experience when new climate risk reporting requirements come into force later this year has been “underestimated”, according to Redington.

The government’s consultation on the draft regulations and statutory guidance for new requirements for occupational schemes with more than £5bn in assets and master trusts to have effective climate risk governance and reporting in place from October 2021 closed today (10 March).

In response, Redington investment consulting team managing director, Carolyn Schuster-Woldan, said that while the costs estimated in the DWP’s impact assessment are “more realistic than those presented in August”, the overall cost burden for pension schemes' reporting in line with the Taskforce for Climate-related Financial Disclosures (TCFD) is “still underestimated”.

“Though we broadly agree with the breakdowns for familiarisation, scenario analysis, metrics and producing the report, the impact assessment does not reflect the outlay schemes will face in the first year of compliance,” she continued.

“We must be mindful that most pension schemes won’t have the required governance, strategy and risk management processes in place at present and, while fiduciary duty requirements means schemes are taking climate change into account as a material risk, the processes required as per the regulations are very specific and will see most schemes having to establish new processes.
“With this in mind, we would urge the DWP to undertake a survey after the first year of regulatory compliance, asking what the actual costs have been in terms of additional trustee, in-house, consultant and asset manager time and resource.”

The Society of Pension Professionals (SPP) also issued its response to the consultation today.

It broadly welcomed the regulations outlined in the consultation, but called for clarity on the timing of trustee knowledge and understanding requirements, on definitions of who certain regulations apply to and on the government’s policy intention in part one of the schedule of draft climate change governance and reporting regulations.

SPP’s response continued: “We consider that in monitoring and enforcing compliance with the new requirements The Pensions Regulator ought to recognise and take into consideration that not all schemes (and advisers) are at the same stage in terms of their familiarity with and knowledge of TCFD governance concepts and reporting.”

It also urged the government to consider altering the statutory guidance to further encourage trustees to consult with employers on scenario analysis and climate-related risks to funding strategy, and to consider using the ‘additional climate change metric’ rather than the ‘absolute emissions metric’ and ‘emissions intensity metric’.

Schuster-Woldan added that Redington believed that promotion of industry collaboration as best practice should be given “greater weighting”.

“Our own experience with initiatives such as the Investment Consultants Sustainability Working Group (ICSWG) has reaffirmed our belief that the regulator should, wherever possible, endorse a collective responsibility for continuous improvement by the industry,” she said.

"We believe providing resources and support to trustees should therefore be a key focus in the initial years of implementation. We would encourage The Pensions Regulator to share examples of innovative approaches to embedding the recommendations of the TCFD as part of this support, ensuring that disclosure in this space leads to real-world change to address the challenges and opportunities of climate change."

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