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UK quietly presses ahead with climate change rules for pension assets

Amendments tabled by pensions minister in upper chamber

The UK government has quietly tabled amendments to planned pensions legislation to include an assessment of pension scheme assets’ exposure to climate change risk.

The amendments, follow-ups from an original amendment back in February, were tabled by Parliamentary Under-Secretary at the Department for Work and Pensions, Baroness Stedman-Scott. She is the sponsor of the bill at the House of Lords, the UK’s upper chamber.

The bill, covering issues such as collective defined contribution pensions and new powers for the Pensions Regulator (TPR), pensions dashboards and pensions funding, is substantially the same as the one that was put on ice due to last year’s general election.

The bill, which started in the Lords, is now at its report stage and may reach the Commons, the lower chamber, later this year, RI understands.

The amendments include the wording that the planned regulations may require pension trustees to take into account (a) different ways in which the climate might change, and (b) different steps that might be taken because of climate change.

And they may require trustees “to adopt prescribed assumptions as to future events”. These could include assumptions about (a) the steps that might be taken for the purpose of achieving the Paris Agreement goal or other climate change goal, or (b) the achievement of the Paris Agreement goal or other climate change goal.

In an explanatory comment, Stedman-Scott said this amendment would alter the Pension Act of 1995 to “require trustees and managers of pension schemes to consider different future scenarios, including scenarios involving the achievement of particular climate change goals”.

The document went live on the Parliamentary website late on Friday night and hasn’t had wide circulation.

Opposition Labour Party peer Baroness Hayman included an amendment to ensure that pension trustees “take account of international climate change treaties of which the UK is a signatory, including the Paris Agreement on climate change”. This is in addition to the “existing, general provision to secure effective governance of a scheme with respect to the effects of climate change”.

Mike Clark, the actuary who runs responsible investment advisory firm Ario Advisory, said: “I am very encouraged by the government’s use of the Pensions Bill currently before parliament to increase UK pensioners’ protection from the financial risks of climate change.”

He said how the TPR implements and enforces the bill will be “crucial”. The TPR is a so-called ‘non-departmental public body’ that is at an “arms length” from the government,

In February there was an exchange of correspondence between the government and the TPR over the regulator’s role in climate change.

Pete Searle, the DWP official who oversees the TPR, had said there is a need to consider the impact of climate change in the context of integrated risk management: trustees must consider the strength of the employer covenant in the face of climate change and set their own strategy accordingly.

He said that an adaptation report due from the TPR should cover the financial risks and opportunities from climate change that impact trust-based occupational pension schemes.

In March, the government-backed Pensions Climate Risk Industry Group (PCRIG) called on pension trustees to challenge their consultants and investment managers on their climate competence.

The context for all this is scathing government criticism of the shortcomings of asset managers on climate change. Pensions Minister Guy Opperman used the pages of Responsible Investor to say trustees are drowning in a tide of greenwash from their managers.

Sources close to the situation suggest the bill does not require schemes to align with the Paris climate accord, as that would require fossil fuel divestment at this stage.

So, instead, the approach is to push for funds to do scenario analysis, with a mandatory requirement a possibility down the line.

Caroline Escott, outgoing Senior Policy Lead on Investment and Stewardship at industry body the Pensions and Lifetime Savings Association (PLSA), told RI that it is “vital that pension schemes use appropriate scenarios to assess the impact climate change will have on their investments”.

“We think the Task Force on Climate-related Financial Disclosures (TCFD) work on scenarios, governance, strategy and risk will help schemes to do so.