Hogan Lovells

Key Dates

Consultation response, final regulations and statutory guidance issued on 8 June 2021.  The original consultation on draft regulations and draft statutory guidance was issued on 27 January 2021.

The Occupational Pension Schemes (Climate Change Governance and Reporting) Regulations 2021 expected in force 1 October 2021.

The Occupational Pension Schemes (Climate Change Governance and Reporting) (Miscellaneous Provisions and Amendments) Regulations 2021 expected in force 1 October 2021.


Summary

The DWP has issued a response to its consultation in January 2021 on draft regulations and statutory guidance to implement the government’s policy of requiring large pension schemes to consider and assess climate-related risks and opportunities and to report on how they have done this in line with the requirements of the Task Force on Climate-related Financial Disclosures (TCFD).

The DWP has responded to concerns raised in consultation by making some changes to its earlier proposals.  The changes do not represent significant shifts in policy but are technical amendments to ensure the legislation and guidance give effect to the policy as intended.  The changes include the following.

Definition of “relevant contract of insurance”

The new requirements only apply to schemes whose “relevant assets” exceed the threshold value (£5 billion for schemes in the first wave).  Annuities (“relevant contracts of insurance”) are excluded from a scheme’s relevant assets.

The definition of “relevant contract of insurance” has been amended so that, in relation to bulk annuities for payment of defined (DB) benefits, the definition better matches bulk annuities held by schemes.

Where the regulations apply for part of a scheme year

The regulations have been amended to clarify that where the climate governance requirements apply only for part of a scheme year, the trustees need only report on the part of the scheme year during which the regulations applied.

Trustee knowledge and understanding (TKU)

The regulations have been amended to reflect the government’s intention that trustees should have an appropriate degree of knowledge and understanding to identify, asses and manage both climate change risks and opportunities equally, and only so far as is relevant to meeting the requirements of the regulations.

The statutory guidance has been revised to clarify that trustees should “understand” (rather than “interpret”) the results of any analysis.  The government anticipates that trustees’ TKU in this area will improve year-on-year and has rejected calls for the expected level of TKU to be “basic”.  It comments that trustees could ask others (such as their investment adviser or asset manager) to describe the results in an understandable way.

The final guidance also explains that trustees are not expected to look for skills gaps among those who carry on governance activities (or who advise on or assist with those activities).  Trustees “may” find it helpful to carry out a skills audit but it is not expected that they do so.

There are no additional measures to verify trustees’ TKU, beyond the existing requirement for relevant DC schemes to produce a Chair’s statement.  However, disclosures in the TCFD report will help demonstrate whether trustees have an appropriate level of TKU.

Those carrying out governance activities

The requirement for trustees to have processes to ensure that persons carrying out scheme governance activities take adequate steps to identify, assess and manage any climate-related risks and opportunities has been amended, to clarify that this applies only to risks and opportunities relevant to the governance activities they are undertaking.

Scenario analysis: timing

Trustees must still undertake scenario analysis in the first scheme year in which they are subject to the requirements.  Trustees who become subject to the requirements part way through a scheme year may rely on scenario analysis carried out earlier in that scheme year, even if this was before the requirements applied to their scheme.

Scenario analysis must be carried out at least every three years.  If trustees carry out fresh scenario analysis earlier than required, the three year cycle will restart from the date of the most recent analysis.

Risk management

The regulations have been amended to make clear that trustees’ processes for identifying and managing climate-related risks should be integrated into their overall risk management.

Metrics

Trustees will now not be required to report on Scope 3 emissions in the first year in which the requirements apply.  (Scope 3 emissions are indirect emissions from sources not directly controlled by the organisation, for example business travel, procurement, production of inputs, waste and water.)

Trustees who become subject to the requirements part way through a scheme year may rely on metrics calculated out earlier in that scheme year, even if this was before the requirements applied to their scheme.

Targets

The regulations have been amended to clarify that targets must be set during the first scheme year in which the requirements apply, not on the first day on which the regulations apply to the scheme. 

Mandatory penalties

A mandatory penalty will only apply where there has been a complete failure to publish a TCFD report.  Penalties for other breaches of the requirements will be subject to the Pensions Regulator’s discretion. 

Trustee engagement working group

The DWP has set up a working group, the Taskforce on Pension Scheme Voting Implementation, to consider how the trustee voice can be strengthened in engagement, especially in voting.  The working group is expected to deliver its recommendations later in 2021.

FCA consultation

The Financial Conduct Authority (FCA) is expected to consult on TCFD-aligned rules for asset managers and for workplace personal pensions “imminently”.  It is proposed that the final rules will be published by the end of 2021 and will come into force in early 2022. 

Review

The government intends to review the effectiveness of the regulations and statutory guidance in 2023, including whether the requirements should be extended to smaller schemes. 



Date Accessed: 03/12/2021