The Pensions Regulator (TPR) has reiterated its climate expectations for pension scheme trustees, emphasising that while trustees don't need to be climate experts, they do need to be able to challenge their advisers and the output from climate scenario analysis.

TPR previously said that it “recognises and shares” concerns that some climate scenarios may show impacts that seem at odds with established science, after industry research raised concerns that "flawed" climate analysis could be placing pension savers at risk.

In a blog post, TPR climate and sustainability lead, Mark Hill, highlighted the reports as demonstration of the limitations of current models and scenario analysis, “rightly” questioning the validity of some published outcomes, which appear to seriously underestimate the financial risk from climate change.

However, Hill argued that this doesn’t have to be seen as a bad thing, stating that this could instead represent a “timely opportunity to take stock and look ahead”.

He stated: “It’s time to take a step back. We need to collectively consider what needs to be done to address the shortcomings in the available models and approaches to scenario analysis if we are to create truly decision-useful climate scenarios.

“Only in this way will practice evolve at the pace required, gaps close and a degree of consensus emerge around climate scenarios.

“Following the recent criticism and concern, it’s clear a degree of revolution, not evolution is needed. Trustees need effective tools and approaches to adequately identify and respond to risks (and opportunities) to avoid savers being left exposed. Starting now, we need to help a new consensus emerge.”

In particular, Hill argued that a more forward-looking approach, including transition planning, will be needed, suggesting that, for trustees in particular, the focus must be on informed decision making leading to accelerated action on risk management, alongside investment opportunities.

But decision-useful climate scenarios are a key part of this, according to Hill, who argued that whilst it’s well understood there are limitations with some elements of data, analytics and modelling, and likely always will be, the decision usefulness of outputs will improve as industry knowledge and understanding develops.

"That said, the window for action is narrowing rapidly," he clarified. "Future change is unlikely to be incremental and some changes, for example, market re-pricing, could happen rapidly. TPR is committed to supporting and helping trustees as collectively, we face this uncomfortable reality.

"The challenge now is to ensure the models used and the scenario analysis addresses a fuller range of real-world risks and uncertainties. Recent events have shown how climate risks can crystallise, compound with other risks and cascade. There is an urgency to protect savers."

Hill also argued that whilst pension scheme trustees do not need to be climate experts, it's "essential trustees appreciate this reality and feel confident to question and challenge their advisers and the output from climate scenario analysis".

"Is the financial analysis consistent with the science? What are the implications of the narratives behind the scenarios? How are tipping points and other non-linear changes accounted for?" he continued.

In particular, Hill said that trustees need to ensure they have appropriate level of knowledge and understanding of climate issues, undertake regular training, and are able to broadly rationalise the outputs from those scenarios for their scheme.

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