‘Glaring omission’ of climate in new funding code for UK DB pension funds

LCP warns that lack of explicit climate expectations means risk is ‘unlikely to be adequately addressed’ by schemes.

Pound coins in a jar

Climate change receives “virtually no attention” in the UK pensions regulator’s new funding regime for defined benefit pension schemes, according to pensions consultancy LCP.

In more than 200 pages of consultation documents and draft rules, the only mention of climate change is in the response to an initial consultation from 2020, which noted that the topic was a key theme among respondents.

Despite this, climate change is unmentioned in the draft put out for a second round of consultation last year, which closes in late March. LCP called this a “glaring omission”.

The DB funding code sets out practical guidance on how scheme trustees in the UK’s defined benefit market can comply with funding requirements for their schemes. The new regime is built on draft funding and investment regulations put out by the Department for Work and Pensions in 2022 and formalises the regulatory approach previously taken by The Pensions Regulator (TPR).

LCP highlighted that TPR had noted the importance of climate change for DB funding in its own three-year corporate plan and its climate strategy, which the regulator said detailed “how we intend to help trustees meet the resulting challenges, managing risks appropriately”.

The consultancy has called on the regulator to explicitly highlight its expectations on the integration of climate risks in investment risk, covenants and funding. Without this, it said, the risk to schemes from climate change is “unlikely to be adequately addressed”, with trustees and schemes possibly not giving the issue priority if it is not explicitly mentioned.

The new code should be “ensuring that climate considerations are an integral part of key strategic decisions rather than an afterthought”, LCP continued.

“Given the vital importance of climate change as an issue when assessing risks around investments and around the strength of the employer covenant, it is a glaring omission for TPR not to mention climate risk at all in its proposed funding code,” said Claire Jones, partner and head of responsible investment at LCP. “If schemes are truly to adopt an ‘integrated’ risk management approach, all material risks need to be considered and this must include climate risk.”

A spokesperson for TPR said: “The DB funding code is currently out for consultation. We will consider responses in due course.”

Boost to investment in renewables

The Department for Work and Pensions (DWP) on Monday set out a series of measures which could boost renewables and illiquid investments in the defined contribution sector.

The measures include a consultation on extending collective defined contribution (CDC) schemes, where employer and member contributions are pooled into a collective fund. The consultation includes proposals for multi-employer CDC schemes. The DWP said that there is “increasing interest” in alternative designs and that it has held almost 30 discussions on the matter.

CDC schemes are likely to have a longer investment horizon than normal DC schemes, so illiquid and renewables investments may prove more attractive to them.

The UK government also published its response to a consultation on removing performance-based fees from the cap on charges that DC schemes are allowed to levy, noting that the responses to the consultation were broadly positive.

The government has repeatedly pushed for pension schemes to allocate more to illiquids, with pensions minister Laura Trott noting in the foreword to the consultation response that it is important that trustees “look to take advantage of new and innovative investment opportunities in green projects, property, infrastructure and start-up businesses”.