The Pensions Regulator (TPR) has said that small defined contribution (DC) schemes that do not take appropriate action to protect savers’ retirements from climate risk should think about quitting the market.

In its new report looking at the risks related to climate change most relevant to UK schemes, TPR found that there are too many small DC schemes where trustees' knowledge of the scale of financial risks posed by climate change is limited.

TPR's data also showed that larger DC schemes perform better than smaller ones on governance of climate change risks, as whilst less than a fifth (17 per cent) of DC schemes had dedicated time or resources to considering climate risk, that rose to 100 per cent for master trusts and 92 per cent of large schemes.

In contrast, TPR found that 53 per cent of medium-sized schemes had dedicated time or resources to considering climate risk, falling to 25 per cent for small schemes and 4 per cent for micro schemes.

In addition to this, TPR's research showed that although more than a quarter (28 per cent) felt that they understood the scale of the financial risks posed by climate change to their DC scheme ‘very well’ or ‘fairly well’, this varied widely by scheme size.

In particular, TPR found that this view was more common for larger schemes (master trusts 100 per cent, large schemes 90 per cent, medium 63 per cent) than smaller (micro 17 per cent, small 29 per cent).

In light of these differences in trustee knowledge and scheme governance standards, the regulator urged trustees of the smaller schemes highlighted to upskill or consider consolidating in savers’ interests.

TPR climate and sustainability business lead, Mark Hill, said: “Good investment governance is critical to protecting and enhancing saver outcomes.

“Trustees, in line with their fiduciary duties, should consider material financial risks arising from climate change and nature loss when making long-term investment decisions and how these risks can be mitigated.

“Where trustees cannot meet our expectations on protecting savers, they should ask themselves if consolidating into a larger scheme would be in their savers’ best interests.”

More broadly, TPR also said that it remains committed to continue educating and supporting trustees on climate issues, and encouraging trustees to go beyond minimum compliance and improve their ability to manage climate change and wider sustainability risks.

It also stressed that it will take enforcement action against trustees of schemes failing to meet statutory duties relating to climate change and wider duties.

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