Fourth Report - Pension stewardship and COP26

COP26, which will take place in Glasgow in November, may well be the largest summit ever hosted in the UK and it provides a major opportunity for the UK to show global leadership. We recommend that the UK Government should … Read more COP26, which will take place in Glasgow in November, may well be the largest summit ever hosted in the UK and it provides a major opportunity for the UK to show global leadership. We recommend that the UK Government should use this opportunity to make every endeavour to build an international consensus on the role of pension schemes and other parts of the finance sector in achieving the goals of the Paris Agreement. Show less

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The Minister for Pensions and Financial Inclusion told us that the Government as a whole is responsible for sharing best practice internationally on investment reporting. We recommend that, in order to increase the prominence and accountability of this important task, … Read more The Minister for Pensions and Financial Inclusion told us that the Government as a whole is responsible for sharing best practice internationally on investment reporting. We recommend that, in order to increase the prominence and accountability of this important task, a single Minister should be responsible for leading this work. (Paragraph 8) Reporting standards Show less

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Global harmonisation of climate-related reporting standards would considerably reduce the burden on pension schemes and the associated costs of meeting different reporting requirements. It would also improve the comparability of different assets across international borders. COP26 provides a significant opportunity … Read more Global harmonisation of climate-related reporting standards would considerably reduce the burden on pension schemes and the associated costs of meeting different reporting requirements. It would also improve the comparability of different assets across international borders. COP26 provides a significant opportunity for the Government to secure international commitments to work towards the global harmonisation of climate-related disclosures. However, work towards global harmonisation of climate-related reporting standards must not be a barrier to the UK implementing its own high standards at pace. We recommend that the Government aims to secure international commitments to work towards the global harmonisation of climate-related reporting standards at COP26. Show less

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We welcome the Government’s decision to include provisions in the Pension Schemes Act 2021 to require pension scheme trustees to fully consider and disclose their climate-related financial risks and opportunities in line with recommendations by the Task Force on Climate-Related … Read more We welcome the Government’s decision to include provisions in the Pension Schemes Act 2021 to require pension scheme trustees to fully consider and disclose their climate-related financial risks and opportunities in line with recommendations by the Task Force on Climate-Related Financial Disclosures (TCFD). We recommend that, as the first economy to mandate TCFD reporting for its pension sector, the UK should play an active role in encouraging and facilitating other economies to do the same. The Government should write to the Committee setting out its plans to engage internationally on this matter after COP26. Show less

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Trustees will need detailed and regularly updated guidelines provided by the Pensions Regulator to explain how they should consider the effects of climate change on pension scheme members. We recommend that the Pensions Regulator continuously monitor and update these guidelines. Read more Trustees will need detailed and regularly updated guidelines provided by the Pensions Regulator to explain how they should consider the effects of climate change on pension scheme members. We recommend that the Pensions Regulator continuously monitor and update these guidelines. Show less

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A green taxonomy will be vital to the success of measures introduced by the Government to tackle climate change. It will support pension schemes, especially smaller schemes, in assessing the merits of different investments and avoiding the risk of “greenwashing”. … Read more A green taxonomy will be vital to the success of measures introduced by the Government to tackle climate change. It will support pension schemes, especially smaller schemes, in assessing the merits of different investments and avoiding the risk of “greenwashing”. We recommend that as far as possible the taxonomy should align with international standards, whilst also reflecting the UK context. (Paragraph 28) 32 Pension stewardship and COP26 Show less

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We have not considered wider environmental, social and governance factors in detail during our inquiry. The Department for Work and Pensions’ consultation on social risks and opportunities by occupational pension schemes closed recently and it is important that these factors … Read more We have not considered wider environmental, social and governance factors in detail during our inquiry. The Department for Work and Pensions’ consultation on social risks and opportunities by occupational pension schemes closed recently and it is important that these factors are considered holistically. We expect to look closely at the Government’s response to that consultation. We urge the Government to publish its consultation response within three months. In the response, it should outline its approach for developing regulations relating to climate change alongside other environmental, social and governance factors. (Paragraph 29) Scheme governance Show less

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Making green investments, particularly in infrastructure, can be complex and costly. Larger schemes are usually better placed to meet those costs and to provide the high level of scheme governance required. We welcome the intent of the Department for Work … Read more Making green investments, particularly in infrastructure, can be complex and costly. Larger schemes are usually better placed to meet those costs and to provide the high level of scheme governance required. We welcome the intent of the Department for Work and Pensions and the Pensions Regulator in encouraging scheme consolidation. We recommend that the Pensions Regulator report annually on the progress made to consolidate schemes within its existing research and analysis publications. Show less

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The idea of “net zero alignment” does not have a single clear definition. Without a standardised definition, there is a risk that different pension schemes will interpret “net zero” in different ways. That will make it more difficult for savers … Read more The idea of “net zero alignment” does not have a single clear definition. Without a standardised definition, there is a risk that different pension schemes will interpret “net zero” in different ways. That will make it more difficult for savers to understand the approach their scheme is taking or to compare schemes. We recommend that the Pensions Regulator define net zero alignment. Show less

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While larger schemes are setting net zero targets, it is likely that many smaller schemes will not have the resources to do this effectively without support and guidance. Ambiguity about whether net zero targets would put trustees at risk of … Read more While larger schemes are setting net zero targets, it is likely that many smaller schemes will not have the resources to do this effectively without support and guidance. Ambiguity about whether net zero targets would put trustees at risk of breaching their fiduciary duty to act in the best interests of their members is also a barrier for trustees. We do not believe that the fiduciary duty itself needs to change, but schemes do need more clarity. We recommend that the Pensions Regulator should establish a working group to develop guidance for schemes looking to set net zero targets. Show less

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Defined contribution schemes used for automatic enrolment are required to have a default option into which the member is enrolled, unless they specify an alternative. We recommend that the Government consult on the case for mandating that these default options … Read more Defined contribution schemes used for automatic enrolment are required to have a default option into which the member is enrolled, unless they specify an alternative. We recommend that the Government consult on the case for mandating that these default options should align to UK Government climate goals. Show less

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Pension schemes make long-term investment decisions for their members. A clear UK—and, where possible, international—climate change strategy will provide greater certainty for pension schemes to make long-term investments. We recommend that the Government set out a UK climate roadmap—including sector … Read more Pension schemes make long-term investment decisions for their members. A clear UK—and, where possible, international—climate change strategy will provide greater certainty for pension schemes to make long-term investments. We recommend that the Government set out a UK climate roadmap—including sector specific pathways for meeting the Paris Agreement goals—to provide greater certainty for pension schemes and other investors, particularly for those investing in in long- term investments such as infrastructure. Show less

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Direct investment by pension schemes in green infrastructure and other illiquid assets has the potential to benefit savers and the environment. We recommend that the Department for Work and Pensions publishes information about levels of direct investment by pension schemes … Read more Direct investment by pension schemes in green infrastructure and other illiquid assets has the potential to benefit savers and the environment. We recommend that the Department for Work and Pensions publishes information about levels of direct investment by pension schemes in its annual report. Show less

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Divestment is the process of selling assets already held by a pension scheme. Divestment remains a fallback strategy for pension schemes with investments in assets which are unable to reduce their contribution to climate change or where a good stewardship … Read more Divestment is the process of selling assets already held by a pension scheme. Divestment remains a fallback strategy for pension schemes with investments in assets which are unable to reduce their contribution to climate change or where a good stewardship approach has failed. Nevertheless, widespread divestment by pension schemes is unlikely to have the required impact on the real economy’s 34 Pension stewardship and COP26 contribution to climate change. Encouraging behaviour change in companies through good stewardship is more likely to be an effective approach to help the real economy transition to net zero. We welcome the Minister’s clear statement that divestment should be a last resort. We recommend that the Department set out, in response to its report, what specific steps it is taking to ensure that its policies do not incentivise divestment over good stewardship—while making clear that schemes could nevertheless consider divestment when there is no other option. (Paragraph 72) Pension stewardship and COP26 35 Show less

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Many schemes have already set net zero targets voluntarily. We encourage other schemes to consider whether they should also set net zero targets. While we recognise that any target must not undermine trustees’ fiduciary duties, we believe that in many cases these will be aligned.

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As a large scheme the Local Government Pension Scheme (LGPS) could be well placed to demonstrate and develop best practice in pension scheme governance, including on climate change. The Minister for Pensions and Financial Inclusion told us that, in his view, the Local Government Pension Scheme should be run by …

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There are a limited number of suitable green assets in which pension schemes can invest. That means that there is a risk of a “green asset bubble” in the short term, as the market for these products develops. It is important that the Government continues to support the development of …

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Pension schemes may already be exposed to brown asset bubbles. Investments, such as non-renewables, may be overvalued if investors have not yet adequately accounted for the cost of changes resulting from either climate change or policies to mitigate climate change.

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The charge caps on default pension saving products used for auto-enrolment are an important part of ensuring good value for savers who have not made an active decision about where their pension should be invested. However, we support the Government’s decision to review whether there are other charging structures which …

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The purpose of pension schemes setting net zero targets is not solely that the schemes themselves should be net zero aligned, but that they should make an impact in reducing the real economy’s contribution to climate change. Good stewardship is a method of achieving that change. Last year the Department …

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