Pensions: What's new this week - 1 September 2020

TCFD governance/reporting duties for pension schemes: new consultation

Pension schemes will soon be required to implement governance and risk management arrangements relating to climate risks and opportunities, and to report on these in line with the recommendations of the TaskForce on Climate-related Financial Disclosures, under proposals outlined in the government’s consultation ‘Taking action on climate risk: improving governance and reporting by occupational pension schemes’.

The introduction of these requirements has been expected for some time, and the Pension Schemes Bill currently going through Parliament sets out the necessary regulation-making powers; this consultation fills in the detail about what is likely to be required, from which schemes, and when. The requirements fall into two categories:

• governance duties: schemes must have effective governance, strategy, risk management, and accompanying metrics and targets for the assessment and management of climate risks and opportunities; and
• reporting requirements. These would include disclosing a scheme’s greenhouse gas emissions and assessing how the value of the scheme’s assets or liabilities would be affected by different temperature rise scenarios, including the Paris Agreement ambitions on limiting the global average temperature increase. The TCFD report would be published online, referenced from the scheme’s annual report, and its availability would be notified to members and in the scheme return.

The government suggests that compliance with these requirements could be deemed to fulfil the standards that will be set out in the Pensions Regulator’s forthcoming Governance Code in relation to climate change. The Code will set out TPR’s expectations on incorporating the consideration of environmental, social and governance factors into a scheme’s ‘effective system of governance’ and the assessment of relevant risks as part of the scheme’s governance own-risk assessment – in both cases, these are elements of outstanding IORP2 requirements.

The government is keen to stress that investment decisions remain with trustees, and that, in its view, active stewardship of assets is more effective than divestment in holding investee companies to account on climate change; it does not support a blanket divestment policy, but does expect trustees to lead change in this area. The proposed roll-out of the requirements is as follows:

• Scheme type/: Schemes with GBP5billion or more in assets, authorised master trusts and collective DC schemes.
• Governance duties: From 1 October 2021, for the rest of the current scheme year and following years.
• Reporting requirements: By the earlier of (a) 7 months after the end of the first scheme year ending after 1 October 2021 or (b) 31 December 2022 (and in subsequent years).

• Scheme type/: Schemes with GBP1billion or more in assets.
• Governance duties: From 1 October 2022, for the rest of that scheme year and following years.
• Reporting requirements: By the earlier of (a) 7 months after the end of the first scheme year ending after 1 October 2022 or (b) 31 December 2023 (and in subsequent years).

A review will be carried out in 2024 on extending the requirements to smaller schemes.

The government is seeking views on the policy proposals set out, and on what should be covered in statutory guidance to support the new requirements. Trustees will be required to meet the standards required by the regulations and to ‘comply or explain’ in relation to the statutory guidance.

The consultation period ends on 7 October 2020. At 94 pages, there is a lot of detail in the government’s proposals (including on how scheme assets will be valued for the purposes of the categories outlined above and what happens in the event of, for example, a transfer-out of part of the membership or a bulk annuitisation, resulting in scheme assets being reduced below a relevant threshold). This will be an important consultation to work through and respond to if you have particular concerns. The government has already stated that it expects significant costs to be involved in putting the new governance requirements in place, estimating these at around GBP15,000 per scheme per year. The impact assessment is available here.

Further regulations are to follow: the government notes ‘increasing momentum’ in support of reporting the ‘implied temperature rise’ or ‘warming potential’ of a scheme’s portfolio of assets. It intends to require mandatory ‘Paris alignment reporting’ along these lines in future, once appropriate methodologies have been developed.

TPR briefings on DB funding consultation

TPR’s latest blog post outlines some frequently asked questions about its defined benefit funding consultation, and is a final call for responses (the deadline is 2 September 2020). In explaining its twin track approach to compliance (bespoke and fast track), TPR comments that all schemes currently use a bespoke approach and are assessed individually; the fast track approach will set out TPR’s expectations for ‘what good looks like’ and, although this route will be more prescriptive, it will streamline the process that trustees go through with TPR.

In addition, TPR recently held a webinar on the DB funding consultation, covering the proposed twin track approach, how fast track guidelines could be developed and how veloped and how the bespoke framework is likely to work in practice. A link to the webinar is available here.

TPR: reminder about AE duties

TPR’s latest compliance and enforcement bulletin shows a marked decrease in the use of enforcement powers during the pandemic, as would be expected due to the temporary additional flexibilities provided. However, TPR’s message to employers now is that ‘while Covid-19 has changed the workplace, it has not changed their automatic enrolment responsibilities towards their staff’. In the press release accompanying the bulletin, TPR also notes two examples of successful enforcement action being triggered by whistleblower reports about contributions not being paid across by employers.

HMRC newsletter

HMRC’s latest newsletter includes a note that some administrators have missed the deadline for submitting their annual return of information. It also sets out some preparatory requirements for migrating to the Managing Pension Schemes service, and an additional reminder that the deadline for issuing annual allowance pension savings statements to members for tax year 2019/20 is 6 October 2020.

PLSA: Climate indexes made simple

The PLSA has published a guide on climate indexes, designed to help trustees understand how these work and how they can help mitigate risk and promote good stewardship.