The Pensions Regulator (TPR) has warned that too few defined contribution (DC) scheme trustees are paying proper attention to risks and opportunities around climate change, confirming plans to publish a strategy supporting trustees in this area in spring.

TPR's comments were made in light of the findings of its annual survey of DC schemes, which revealed that just under half (43 per cent) considered climate change in their investment strategies.

The pre-Covid survey also found that whilst 19 per cent of those who had failed to consider climate change were planning to review this, a "concerning" 21 per cent felt that climate change was not relevant to their scheme.

In addition to this, a further 5 per cent stated that there was not enough member demand to warrant it, a 3 percentage point increase on 2019, whilst 9 per cent stated that they had not thought about it.

However, the regulator acknowledged that the number of schemes considering climate change has doubled since 2019.

It also clarified that 95 per cent of all members were in a scheme that considered climate change, a 13 percentage point increase on 2019, as the “vast majority” of members are in master trusts, 94 per cent of which took account of climate change.

In light of the findings, TPR has confirmed that it will “for the first time” publish a strategy setting out how it will help trustees meet challenges around climate change, expected to be published in spring.

TPR executive director of regulatory policy, analysis and advice, David Fairs, added: “Our survey shows trustees of DC schemes must give greater attention to the risks and opportunities facing their schemes from climate change.

“The Pension Schemes Bill – which we expect will become law very soon – will see requirements for the effective governance of climate change risks and opportunities written explicitly into pensions law in the most comprehensive way to date.

“Trustees already need to consider climate change as part of their statement of investment principles but the new act will significantly increase the expectations placed upon them.

“Although a phased approach means the new act won’t affect all DC schemes to start with, it will increase the expectations savers have of those responsible for their pension pots when it comes to climate change.

“Climate change risks will threaten pension savings right across the industry.

"This means trustees should build their capacity in this area now, so they can understand what climate change will mean for their scheme and so be better placed to make decisions contributing towards good outcomes for savers.”

Commenting on the findings, Pensions Minister, Guy Opperman, added: "This is not acceptable. Already, most larger DC schemes, including master trusts, have recognised and acted on the need to act on climate change.

"The smaller scheme trustees must change. They should act in their members’ interests and consider consolidation. Where they do not act, TPR will intervene."

The findings follow recent government confirmation that large pension schemes,
those with more than £5bn in assets and authorised mater trusts, will face new climate risk governance and reporting requirements.

The Investment Consultants Sustainability Working Group has also recently launched a guide to support pension trustees in assessing their investment consultants on climate competency, hoping to help raise investment consultants' standards.

In addition to the concerns around climate change considerations, the survey found that whilst the proportion of schemes meeting KGR2, the value for members assessment, was unchanged from 2019, the proportion of members who were in a scheme that met this assessment fell from 80 per cent to 58 per cent.

The regulator explained that this fall was primarily as a result of one of the larger master trusts having met this KGR in 2019 but not 2020, highlighting schemes failing to research and take account of what members value as the main barrier for this assessment, with just 32 per cent of schemes meeting this requirement.

Data issues were also raised, with 8 per cent of schemes identifying issues with the quality of their data over the past two years, increasing to 33 per cent amongst large schemes, and 50 per cent for master trusts.

In addition to this, the research revealed that fewer than a fifth (16 per cent) of schemes included administration on the agenda at trustee board meetings every quarter, although 74 per cent did so at least annually.

However, the majority of schemes had little or no knowledge of the accreditations held by their administrators or the standards they complied with, with TPR highlighting this lack of knowledge as being particularly evident amongst micro schemes.

Micro schemes were also the main driver behind concerns that the regulator’s new approach would create a lot of extra work for trustees, with 73 per cent agreeing with this statement in 2020, compared to 38 per cent in 2019.

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