The UK’s largest workplace pension schemes must comply with new mandatory requirements to take action on climate change under government measures that will also pile pressure on the fund management industry.
From October, trustees of pension plans with more than £5bn in assets will have a legal duty to report on the financial risks of climate change within their portfolios.
The government announced the measures, which will apply to schemes with more than £1bn in assets from October 2022, in a consultation response published on Wednesday.
“Broadly speaking trustees will be required to assess in some detail what different climate change scenarios might mean for their portfolios, liabilities and, critically, their sponsors,” said Michael Bushnell, managing director of Lincoln Pensions, the pension advisers.
“Asset managers are going to have to work hard to get that information. They will need consistent scenario analysis, not just from asset managers, but also others including actuaries and covenant advisers as well.”
The Department for Work and Pensions said the government had made clear the changes “will not, and cannot, be used to direct pension scheme investment in any way”.
However, Mr Bushnell said he expected the new measures would drive “a significant move to ESG positive investments”.
The move comes as the government steps up its efforts to force businesses to assess the environmental impact of their activities.
Last year, UK chancellor Rishi Sunak outlined steps that the government and regulators would take towards rolling out mandatory climate reporting across the economy by 2025.
Under this road map, pension scheme trustees, asset managers and insurers disclosing climate-related financial risks and opportunities must do so in line with recommendations set by the Task Force on Climate-related Financial Disclosures (TCFD).
“Climate change is a major systemic financial risk and a threat to the long-term sustainability of private pensions,” said Guy Opperman, minister for pensions and financial inclusion.
“With £2tn in assets under management, all occupational pension schemes are exposed to climate-related risks. I am committed to ensuring that trustees do everything they can to limit this risk to their members’ future income.”
The government said in 2023 it would review whether smaller schemes should be subjected to the new requirements.
“Trustees of smaller schemes may think that today’s announcement doesn’t matter to them, but they would be mistaken,” said Claire Jones, head of responsible investment at Lane, Clark & Peacock, the actuarial advisers.
“The government made it clear last August that all trustees are expected to take action to address climate risk — whatever their scheme size — in line with their fiduciary duties.”