UK pensions regulator says trustees must ensure quality of external advice on climate risk reporting

The UK’s Pensions Regulator (TPR) has told trustees that they must “take responsibility” for ensuring the quality of advice they receive from external experts to help them meet new climate risk reporting requirements.  

“Trustees must take responsibility for ensuring their advisers have the appropriate skills and expertise and the advice they offer is relevant, helpful and represents value for money. After all, ultimately it's trustees who are responsible for any decisions,” the TPR said in its finalised guidance on TCFD reporting.  

The comments come as the Financial Conduct Authority (FCA) finalised rules on disclosures for publicly listed companies, who will now have to include a statement in their annual financial reports on whether their disclosures meet TCFD standards on a comply or explain basis. As previously reported, TCFD reporting for FCA-regulated asset managers and owners will come into force from the 1st of January. 

TPR’s guidance comes after an industry consultation launched in July, in which respondents were broadly supportive of its draft recommendations. The main areas of criticism from respondents to the consultation lay around clarity on scenario analysis which trustees will be required to carry out under new regulations, and lack of detail on fiduciary duty and covenant issues.  

With the area rapidly developing, the regulator warned that trustees seeking external expertise should make sure their advisers have the right capabilities.

David Fairs, TPR’s Executive Director of Regulatory Policy, Analysis and Advice, said: “Trustees make use of external expertise in a variety of areas. However, we recognise that the governance and reporting of climate-related risk is relatively new, so trustees may be more reliant on external experts while they build their scheme’s capability in this area.”  

The new rules on climate change governance and TCFD reporting currently apply to schemes with more than £5bn in assets. They will be rolled out to schemes with over £1bn in October next year, with a possible extension to smaller schemes in 2023.  

A number of respondents to the consultation also raised concerns over TPR’s use of fines for noncompliant trustees – where a TCFD report is not published, trustees will be subject to a mandatory fine of up to £5000, and schemes up to £50,000. Concerns were raised over higher fines for professional trustees and a lack of clarity over additional discretionary fines that TPR can impose for breaches of the new governance legislation. In response, the regulator added additional examples of breaches which could lead to fines, and said it recognised this was a new and challenging area, so it would be taking a “risk-based and proportionate” approach. 

Nigel Peaple, Director of Policy and Advocacy at the Pensions and Lifetime Savings Association (PLSA), said he was pleased to see that TPR had taken some of the PLSA’s suggestions into account.

“However, we would welcome more guidance to be made available to trustees in both the toolkit and the issue of covenant guidance – the employer's legal obligation and financial ability to support the scheme now and in the future, while integrating new climate change risk with accuracy – still remains,” he continued. 

“Climate-aware investing is at the forefront of a lot of decisions. To ensure that our members are best placed to deal with this continued issue it is vital that more is done to ensure the guidance and toolkits made available are fit for purpose as soon as possible”.