ESG amendments to give govt ‘unprecedented new powers’

The Pensions and Lifetime Savings Association has warned that government bodies will have “unprecedented new powers” to interfere in pension schemes investment strategies if an amendment to the Pension Schemes Bill is passed.

Baroness Stedman-Scott, a minister for Work and Pensions sitting in the House of Lords, introduced an amendment on Tuesday on environmental, social and governance practices, which means reporting on climate change strategies will become mandatory for pension schemes.

The changes follow a meeting between Secretary of State for Work and Pensions Therese Coffey and governor of the Bank of England Mark Carney, who met last week to discuss how to take forward the work of the Taskforce on Climate-Related Financial Disclosures.

The Department for Work and Pensions stated it will launch a consultation on the new rules, which will need to be laid out in secondary legislation.

According to the amendment, pension scheme trustees will have to review the impact of climate change on their investment strategy, manage their exposure to these risks and determine targets for their exposure to these pitfalls.

The government has already introduced new rules in this area last year. All trust-based occupational pension schemes with at least 100 members are required to prepare and review their statement of investment principles at least every three years or after any significant change in investment policy, including policies on “financially material” considerations.

Since October 2019, defined contribution schemes are obliged to make their SIP freely available on a website, and a year later they must produce an implementation report that explains how they have followed and acted on the investment policies outlined in the SIP. 

Ms Coffey said: “Pension schemes shouldn’t be dragging their heels when it comes to their climate change strategy.

“We’ve already introduced regulations that require pension trustees to set out their policy on climate change, but now we’re taking things a step further.

“I want the UK to continue leading the way on the climate emergency defining the twenty-first century.”

Despite fully supporting initiatives that help pension schemes with assessing climate change risks, the PLSA has expressed alarm at the implications of this amendment.

Joe Dabrowski, head of defined benefit at the Local Government Pension Scheme, said parts of the new amendment  “appear to go significantly beyond" the current rules, and would "give unprecedented new powers to government bodies to interfere and request changes to private sector schemes’ investment strategies".

“If that’s the case it would set a dangerous precedent and be wholly inappropriate. Nothing should cut across schemes’ fiduciary duty and freedom to invest in members’ best interests – and this will vary scheme by scheme," he said, urging the government to redraft the bill and clarify its intentions.

Anna Copestake, partner at Arc Pensions Law, agreed the new rules paved the way, in theory, for the government to start dictating how pension schemes manage their investments.

She said: “Surely that’s not the intent? It would fundamentally change the nature of the trustee role. We can’t tell which pension schemes would be affected or what they would have to do. 

She said key issues, such as how the new rules would interact with existing SIP legislation, are yet to be clarified by regulation.

While the new amendment leaves some questions unanswered it would apply to all occupational pension funds, including defined benefit, and come with hefty fines for non-compliance - £5,000 in the case of an individual, or £50,000 in any other case.

Penny Cogher, partner at Irwin Mitchell, noted the amendments were “fairly simply drafted, and there is scope for the Secretary of State to issue formal guidance", but added that "what will alarm trustees and scheme manages is the ‘stick’” of penalties from the Pensions Regulator.

She added: “These amendments are a natural development of the new laws on ESG that came into force last year, with the focus firmly on climate change and its impact on scheme investments and investment strategies.

“They are also in line with the views of the many of the public who do want parliament and pension schemes to move ahead more quickly on helping to tackle climate change issues.”

However, Sophia Heathcoat, client strategist at Cardano, questioned whether this legislation was the best way to implement these changes.

She said: “What we need to make sure is that this doesn't just become a tick box, something else they need to add to their to-do list. There is also going to be a cost to providing this disclosure."

Arguing that the government has sought to put pressure on investors rather than take action directly at a corporate level, she asked: “Is that the best street to take? Shouldn’t there be further climate disclosure requirements in corporate accounting standards instead, that would then give pension schemes the ability to see what the climate impact is?”

Ms Heathcoat also noted such a requirement would need a clear and standardised approach, so that “the disclosures being made are helpful, impactful, but also comparable.

“You don't want a set of disclosures where trustees, investment consultants or managers have different interpretations,” she added.

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