Zarah ChoudharySmall defined contribution (DC) schemes that do not take appropriate action to protect savers’ retirements from climate risk should think about quitting the market, said The Pensions Regulator (TPR).
UK private occupational pension schemes manage around £1.4tn worth of retirement savings for millions of savers.
TPR outlined the risks related to climate change most relevant to UK schemes, as well as the steps it has taken to raise standards of investment governance and systemic risk management.
The report showed that there are too many small DC schemes where trustees’ knowledge of the scale of financial risks posed by climate change is limited.
As a result, TPR called on those trustees to upskill or consider consolidating in savers’ interests.
Mark Hill, climate and sustainability business lead at TPR, 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.”
According to TPR’s data, larger DC schemes perform better than smaller ones on governance of climate change risks.
A recent survey showed that only 17% of DC schemes had dedicated time or resources to considering climate risk, but that rose to 100% for master trusts and 92% of large schemes compared with lower proportions for medium schemes (53%), small schemes (25%) and micro schemes (4%).
28% of respondents 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 and was more common for larger schemes (master trusts 100%, large schemes 90%, medium 63%) than smaller (micro 17%, small 29%).
The TPR report looked at the approaches trustees took to tackle these risks and the level of commitment.
It added TPR will continue to educate and support trustees and questioning their decisions where appropriate.
TPR will also enforce against trustees of schemes failing to meet statutory duties relating to climate change and wider duties.
Finally, it encouraged trustees to go beyond minimum compliance and improve their ability to manage climate change and wider sustainability risks and work with Government, regulators and industry on initiatives to improve industry’s management of climate and ESG risks.
