UK TCFD – Occupational pension schemes

What?

From October 2021, the Occupational Pension Schemes (Climate Change Governance and Reporting) Regulations 2021 (as amended, the “Regulations”) introduced new requirements relating to reporting in line with the Task Force’s recommendations, to improve the quality of governance and the level of action by trustees of OPS in identifying, assessing and managing climate risk.

Of particular note, trustees must select and, as far as they are able, calculate and report annually on a minimum of one absolute emissions metric, one emissions intensity metric and one additional climate change metric. The Government has also consulted on amending the Regulations to require in-scope trustees to calculate and disclose an additional portfolio alignment metric, setting out the extent to which their investments are aligned with the Paris Agreement goal of limiting the global average temperature increase to 1.5 degrees Celsius above pre-industrial levels. The finalised legislation has not yet been published, but the Government originally proposed that this requirement would apply to in-scope schemes from 1 October 2022.

For the purposes of calculating their chosen metrics, Trustees must obtain, as far as they are able, the Scope 1, Scope 2 and Scope 3 GHG emissions for the scheme’s assets. Although trustees are not required to obtain Scope 3 emissions in the first scheme year during which they are subject to the requirements in the Regulations.

Timing

The requirements are being phased-in and have applied:

since 1 October 2021 to trustees of schemes whose relevant assets are equal to, or exceed, £5bn at the scheme year ending on or after 1 March 2020, authorised master trusts and authorised collective money purchase schemes; and
since 1 March 2022 to trustees of schemes whose relevant assets are £1 billion or more (but less than £5bn) at the scheme year ending on or after 1 March 2021.

The Government intends to review how these rules apply to smaller schemes in the second half of 2023.

Trustees must prepare their first TCFD report and publish this on a freely available website within seven months of the scheme’s first year-end after the Regulations applied to them, and for each year thereafter where the scheme continues to meet the threshold criteria.

What does this mean for GPs?

Firms are likely to see an uptick in requests for data from OPS trustees over the coming months. The different phasing-in periods of the OPS and FCA regulatory regimes means that in many instances OPS trustees will be required to publish their first report ahead of when their UK asset managers are required to publish theirs or provide on demand TCFD product reports and underlying asset data for the first time. During this window, subject to any overriding contractual provision, Firms have discretion in how to address OPS trustee requests but availability of data, reputational risk and the potential effect on investor relations are likely to be relevant considerations.

Data gaps and challenges

In preparing their TCFD reports under the OPS regime, statutory guidance recognises that there may be gaps in the data trustees are able to obtain about their scheme assets. However, whilst trustees may treat certain data as unobtainable, they are expected to set out a robust justification for doing this in the scheme's publicly available TCFD report.

Once the FCA's TCFD rules are in force, OPS trustees’ metrics and data gathering obligations are expected to dovetail with the FCA requirements for in-scope managers to provide investors with basic data and certain additional climate or carbon-related data on demand (where applicable – see above). This could mean that Firms which fail to provide data requested by OPS trustees could face public criticism and regulatory risk, for example where it can be shown that it would otherwise have been reasonably practicable to provide the requested data.

The Pensions Regulator will also be able to issue compliance notices against third parties if it considers that they are responsible for a trustee’s failure to comply with the new governance and disclosure rules. On the other hand, we expect both regulatory regimes to include a degree of flexibility so that, pending more standardised market practice emerging, a balance can be struck between the diverse data needs of different OPS trustees and what data it is reasonably practicable to expect Firms to be able to provide.

Trustees are also required to undertake scenario analysis, “as far as they are able” considering the effects of a potential rise in global temperatures for at least two scenarios. However, guidance from the Department for Work & Pensions notes that it may be easiest for trustees “to do a “top-down” analysis of the scheme-level risks to their scheme’s aggregated portfolio. This may be easier than starting from information from asset managers about individual asset classes. It is also likely to be difficult for trustees to aggregate scenario analysis that has been done on different asset classes or by different managers for reasons such as different underlying assumptions.” Firms may wish to bear this in mind if they receive requests relating to data for scenario analysis.

Lastly, because the pensions legislation requires trustees to demonstrate adequate understanding, governance and risk management, firms should also anticipate greater scrutiny from OPS clients and their advisers concerning climate risks and opportunities at both a Firm and product level, both in manager selection processes and on an ongoing basis.