Pension trustees warned against climate complacency

Trustees have been urged not to underestimate the challenges of climate change regulation, after a survey from LCP revealed that over a quarter (29 per cent) of defined benefit (DB) schemes are only aiming to achieve minimum compliance with the new rules.

The research found that just 5 per cent of DB schemes are aiming to be market leading under the new rules, and whilst nearly half of schemes already allow for climate change risks on the employer covenant, some 40 per cent did not.

LCP also noted that while the Pensions Schemes Act has brought in specific requirements for larger schemes to enhance their climate governance, the majority of DB schemes surveyed expect little impact on the operation of their pension scheme across all the new requirements in the act.

However, 64 per cent of schemes are expecting some impact from new governance requirements and the need for trustees to have in place an effective system of governance (ESOG), with 18 per cent expecting a "significant impact".

In light of the findings, LCP has warned that pension scheme trustees "can't afford to ignore the potentially turbulent waters ahead if climate-related risks aren't put at the top of the agenda".

LCP partner and author of the report, Mary Spencer, stated: “Pension schemes may be breathing a sigh of relief that they appear to be reaching safe harbour post pandemic.

"While the best prepared schemes are already on top of climate and regulatory risk there are some that are not. Climate regulation is an accelerating force and pension schemes will be left behind the curve unless they make significant changes.”

The comments echo warnings from The Pensions Regulator (TPR), which recently published guidance on the upcoming climate regulations, having previously warned that DB schemes are under-prepared for the incoming climate regulations.

The research also suggested, however, that the pandemic has had a “surprisingly benign impact” on scheme funding, with a typical DB scheme now around 5 per cent ahead in funding terms compared to pre-Covid levels.

Indeed, the majority of schemes surveyed stated that the pandemic had had no impact or even a favourable one on all aspects of their scheme, with 29 per cent saying there was a positive impact on funding and investments.

Nearly all (95 per cent) of the schemes surveyed also stated that the pandemic either had a positive impact on or had made no change to their approach to governance and decision making.

In addition to this, very few schemes have changed their mortality assumption in light of Covid-19, with 97 per cent of respondents maintaining their current assumption, at least for the time being.

Looking more broadly, the survey found that the majority (84 per cent) of DB schemes now have a long-term funding target in place, compared to 75 per cent last year, with 29 per cent expecting to achieve their target within five years.

Around a third (32 per cent) of schemes also identified considering their long-term funding target framework as their number one priority for the year, whilst around a fifth (22 per cent) expected to focus on sorting data and benefits including GMP.

Despite this increased focus, LCP noted that some 15 per cent of schemes are still yet to set up a long-term funding target framework, and will need to have this in place for their first valuation under The Pensions Regulator's new DB funding framework.

LCP partner and author of the report, Jill Ampleford, said: “Our analysis reveals that many schemes are overwhelmed by the number of issues to consider over the coming year, particularly around data and governance.

“Trustees are having to work hard to think strategically and are focused on agreeing and maintaining a viable long-term funding plan.”

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