Nearly 80% of UK defined contribution pension schemes do not consider climate change despite imminent new rules

A poll of UK defined contribution (DC) pension schemes found that 79% of them have not considered climate change in their investment strategies and policies — with 35% of respondents saying the issue is “not relevant” and 15% saying it is not a requirement.

These results were revealed in an annual survey of DC schemes with more than 100 members by UK supervisory authority the Pensions Regulator (TPR).

“Any scheme not considering the transition to the low carbon economy is failing to protect members” — NEST

Some schemes which did not take climate change into account felt that they had “other priorities and not enough time” (14%), while a small minority said that doing so would “provide lower return on investment” (4%).

However, the schemes which have not considered climate represent only 18% of total DC membership as they are mostly smaller schemes.

Among the 21% of DC schemes which have addressed climate change, the most common actions consisted of discussions with other trustees, investment advisors and other service providers. But only 24% of these schemes have assigned climate responsibilities to a specific trustee or subcommittee.

It comes only two months before new disclosure requirements are due to kick in for DC schemes. By October 1, pension fund trustees must set out their investment policies in relation to “financially material considerations”, including climate change and other ESG factors.

In 2020, trustees will subsequently be required to produce a public implementation report describing how these policies were acted upon.

The disclosure requirements were brought into force by UK Pensions Minister Guy Opperman who has taken a hardline stance against trustees who do not consider climate change risk, describing such behaviour as “bordering on negligence”.

In a recent op-ed for RI , the minister also branded asset managers who do not act on climate risk as “zombies”.Diandra Soobiah, Head of Responsible Investment at NEST, a workplace DC scheme set up by the UK government, said: “Any pension scheme not considering the transition to the low carbon economy in their investment strategy is failing to protect their members. The evidence is clear – ESG investing has a demonstrative track record in reducing investment risk and helping to achieve better long-term investment returns.”

Lauren Peacock, Campaign Manager at ShareAction, added: “It is highly concerning to see that schemes are still seeing climate change as an optional extra, rather than as the financially material systemic risk it is.

“Climate change risk will affect all asset classes and industries and cannot be ignored. Members will rely upon their pension investments for years to come.”

This is the first time that the topic of climate change has been included in TPR’s annual survey. It comes in the same year that TPR has been asked to assess and report on the impact of climate change on its ability to regulate pensions schemes, in addition to setting out policies for adaptation.

Under the UK’s 2008 Climate Change Act, the Department for Environment, Food and Rural Affairs (Defra) – the government agency responsible for environmental protection – has the power to direct public bodies to report on climate change risk management.

In its third reporting round – announced in December 2018 – Defra formally invited the UK’s financial regulators to submit their climate change strategies. Aside from TPR, they are the Financial Conduct Authority (FCA), the Financial Reporting Council (FRC) and the Bank of England’s Prudential Regulation Authority (PRA).

Reporting is set to conclude by December 2021.

In an earlier round, the Bank of England’s reporting to Defra prompted a review of the banking and insurance industries culminating in a policy statement setting out expectations for the integration of climate-related factors into financial decision making.

It is hoped that Defra’s engagement with the other regulators will kick-start similar undertakings in their respective industries.