How does the enhanced climate change reporting affect workplace pension schemes?

Need to know:

  • Trustees of large pension schemes and master trusts now have an additional obligation to publish a forward-looking measure of their scheme’s alignment with the Paris Agreement.
  • There is effectively a choice of three methodologies to accomplish this.
  • Trustees and employers should ensure the pension investment strategy aligns with the business’s own corporate social responsibility strategy.

Trustees of large occupational pension schemes and master trusts will soon be required to publish a new, fourth Paris alignment metric, as part of the government’s Task Force on Climate-related Financial Disclosures (TCFD) obligations. The new metric will be forward-looking and measure how well a scheme’s investments align with the Paris Agreement goal of limiting global temperature rises to 1.5 degrees above pre-industrial levels.

The requirement will apply to schemes already complying with TCFD reporting requirements, namely master trusts and occupational schemes worth £1 billion or more. Trustees of these schemes already have to calculate and disclose three backward-looking measures: the scheme’s total greenhouse gas emissions, the emissions of the scheme’s assets per unit of currency, and one other metric of choice assessing climate-related risks and opportunities relevant to the scheme’s assets.

While schemes of £5 billion and master trusts have had to meet the original TCFD obligations since October 2021, schemes with £1 billion in assets were only compelled to do so from 1 October this year. It is therefore early days, and a consultation is expected in 2023-24 for schemes in the £500 million to £1 billion range.

Alignment metrics

The government has published statutory guidance on the types of enhanced alignment metrics trustees may choose to report. These can be based on a binary target metric, which measures the portfolio’s alignment against a given outcome based on the percentage of its investments with aligned targets; a benchmark divergence model, which compares the forecast emissions of investments in the portfolio against a benchmark; and implied temperature rise (ITR) models, which translate an assessment of the portfolio’s alignment or misalignment with a benchmark in the form of a temperature score.

Alison Leslie, senior DC consultant at Hymans Robertson, says: “Our preference is for the first option, binary target measurement, as it is a simple, understandable metric where the actions that can be taken to improve performance against the metrics are clear.

“We also see value in implied temperature rise models, as this is the most appropriate for measuring progress over longer time periods. However, there is still some way to go in terms of ensuring the methodology behind it is clear and consistent.”

Gaps in data

There are gaps in the investment data trustees are able to obtain for climate change reporting purposes, particularly for illiquid assets such as infrastructure, private equity and private credit. However, the regulator says the reports need only be completed as far the trustees are as able, with a degree of effort that is reasonable and proportionate.

Claire Jones, head of responsible investment at LCP, says: “The onus is on trustees to use their influence with asset managers to collect data. The investment manager entity-level and product-level disclosures implemented by the FCA will become published in due course which will help. The Pensions Regulator has also indicated that it will be quite supportive of trustees in the early years as long as they have tried to follow the guidance, although certain breaches will incur a fine, such as failure to publish a report at all. A review of the new regime is scheduled for the second half of next year, which will provide information on how the regulator thinks trustees are doing.”

There is acceptance that the industry is still learning and collaborating on how best to carry out decision-useful analysis at this early stage, says Leanne Clements, head of responsible investing at B&CE. “There is a belief that the data availability and methodologies used for scenario analysis will improve rapidly as we progress from this first reporting period.”

Reporting timeframe

A TCFD report must be published within seven months of the next year end. This should be an opportunity to engage the workforce. According to the Department for Work and Pensions (DWP), pension schemes should include a member-friendly statement, and some schemes such as the Universities Superannuation Scheme have already produced short summaries. It is particularly effective to share good news stories with members about the difference their savings have made in specific areas.

Charlotte O’Leary, chief executive officer (CEO) of Pensions for Purpose, says: “Good reports will provide details that adequately explain the potential climate impact on different parts of an organisation, its sectors and their geographies. Discussion of climate-related risks and opportunities should also be balanced, so consideration needs to be given to both the positive, such as the size of the opportunity, and the drawbacks, such as technology dependencies, versus the status quo. TCFD shouldn’t exist in a vacuum, but be linked to other forms of reporting, especially disclosures made in the annual report.”

Critically, trustees and employers should ensure their pension investment strategy aligns with the organisation’s own corporate social responsibility strategy, says Mark Bowen, principal, employee benefits, Punter Southall.

There can also be tension where an employer has set an early net-zero target date for its organisation, as it is not easy for a pension to work to a date earlier than 2050, says Jones. There may be a reputational risk of having different dates until the media become more familiar with these issues.

Trustees in defined benefit (DB) schemes are also wrestling with assessing the likely impact of climate change on the sponsoring employer’s covenant.