Trustees of occupational pension schemes with more than £5bn will be required to publish a TCFD report

The government has confirmed details of how UK pension schemes will be required to report on climate change issues affecting their portfolios.

The Department of Work and Pensions (DWP) confirmed this week that from October 2021 occupational pension schemes with more than £5bn in assets and authorised master trusts must have effective governance, strategy and risk management processes, along with metrics and targets, for the assessment and management of climate risks and opportunities.

Trustees of schemes are also required to report in line with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), and must include a link to this report in their annual accounts by 2022.

Schemes with more than £1bn in assets will be subject to the climate governance requirements from 1 October 2022, and the trustees must publish a TCFD report within seven months of the scheme year end date, or by 31 December 2023 if earlier.

The DWP said it would conduct an interim review in 2023 and consult more widely again in 2024 before deciding whether to extend the regime to schemes with less than £1bn in assets. The department said it would consider the quality of climate risk governance and associated disclosures carried out, and the current and future costs of compliance.

The proposed regulations will require trustees to undertake scenario analysis in the first year and every three years thereafter.

Pensions minister Guy Opperman said: “Climate change is a major systemic financial risk and threat to the long-term sustainability of private pensions. With £2trn in assets under management, all occupational pension schemes are exposed to climate-related risks.

“Our proposals are world leading. The UK is set to become the first major economy to require climate risks to be specifically considered and then reported on by pension schemes. The new measures will ensure trustees are legally required to assess and report on the financial risks of climate change within their portfolios.”

The consultation on policy proposals was launched on 26 August 2020 and ran for six weeks. In total the government received 99 formal responses, including from the Co-operative Group, Nationwide Pension Fund and HSBC Bank Pension Trust.

Very few respondents were opposed to the proposals in full, and a significant majority supported the concept of an asset-based threshold.

However, while there were some calls from respondents to significantly raise the proposed £1bn threshold for reporting, most wanted to see the limit move below this figure.

Joe Dabrowski, deputy director for policy at Pensions and Lifetime Savings Association (PLSA), said: “We are pleased the government has listened to our concerns with respect to the frequency with which trustees should conduct their scenario testing. This strikes the right balance between encouraging trustees to understand, report and address the risks in their portfolios, without making the requirements too burdensome.”

Nico Aspinall, chief investment officer at The People’s Pension, said in a social media post: “Good governance is crucial to any successful occupational pension scheme so anything that assists trustees in considering the environmental impact of decisions they make is to be welcomed.

“The People’s Pension is committed to tackling climate change and has actively engaged with the Department for Work and Pensions through their earlier consultation on how best to apply the TCFD recommendations to UK pension schemes.

“We will carefully consider the proposals contained within this latest consultation document before responding.”