Climate change governance and reporting: new consultations and guidance

New climate change governance and reporting requirements for occupational pension schemes have been published for consultation. Once these are finalised, large pension schemes and master trusts will have only a few months to ensure compliance.

Last summer, the government consulted on policy proposals covering governance, strategy, risk management and accompanying metrics and targets for the assessment and management of climate-related risks and opportunities. It has now published its response to that consultation and is consulting on draft implementing regulations and guidance. Non-statutory industry guidance on assessing, managing and reporting climate related risks in line with the Taskforce on Climate-Related Financial Disclosures (TCFD) is also available.

The new requirements will be phased in over several years, beginning from 1 October 2021 with schemes that had £5 billion or more in assets (excluding bulk and individual annuity contracts) as at the first scheme year end date after 1 March 2020, together with authorised master trusts and authorised collective DC schemes. Schemes with at least £1 billion in assets as at the first scheme year end date after 1 March 2021 will be in scope from 1 October 2022. The government will hold a review in 2023 on whether to extend the requirements to schemes below the £1 billion threshold.

Trustees of in-scope schemes will be specifically required to have appropriate knowledge and understanding of the principles relating to identification, assessment and management of climate change risks and opportunities to properly exercise their functions. Trustees will need to review their governance processes and strategic and risk management approaches in relation to climate change, as well as meeting the key duties set out below.

We recommend that trustees schedule training to familiarise themselves with these developments. 

View the consultation documents (the deadline for responding is 10 March 2021).

Read the non-statutory industry guidance.

Timing of key duties 

Schemes in the first phase (having at least £5bn in assets as above, plus master trusts and collective DC schemes) must:

• meet the climate change governance requirements for the remainder of the scheme year that is ongoing as at 1 October 2021 (and subsequent years); and
• publish a TCFD report within seven months of the end of the scheme year which is underway on 1 October 2021 (and subsequent years) and include a link to it in the annual report for the scheme year.  

Schemes in the second phase (having assets of £1bn or more as above) will have to comply one year later than these deadlines.

Scenario analysis and metrics: further information

In addition to knowledge, governance and strategy requirements, trustees will be required to carry out specific activities including scenario analysis (measuring the impact of particular climate change scenarios on the scheme’s assets and liabilities and assessing the scheme’s resilience to such scenarios), and measuring performance against climate change metrics. Trustees must choose at least three different climate-related metrics and two scenarios for these purposes; in recognition of possible data gaps, the duty is to carry out the assessments ‘as far as the trustees are able’. This means taking steps that are reasonable and proportionate in the context of the scheme, taking into account financial and time costs. 

Scenario analysis is the most complex aspect of the requirements, so it’s good news that the government now proposes that it should be reported in the first year and then on a three-yearly, rather than an annual, basis. In the intervening years, trustees will need to consider whether or not they should refresh their analysis and, if they decide not to, explain why. Trustees will have to obtain data to calculate their chosen metrics and measure performance against targets at least annually (rather than quarterly), using a minimum of two emissions-based metrics (one absolute and one intensity-based), as well as one additional climate-related metric.

There is a lot of detail here that trustees will need to get to grips with, and some schemes will have a tight deadline. Please get in touch with your usual Allen & Overy adviser for further information and to arrange training.

PPF: levy documents 2021/22, new consultation

The Pension Protection Fund’s (PPF) final levy rules for 2021/22 are now available. The PPF had previously confirmed the key changes including:

• levy estimate of £520 million and levy scaling factor of 0.48;
• risk-based levy cap reduced to 0.25% of liabilities; and
• a reduction in the levy for small schemes (the small scheme adjustment).

View the key deadlines for the 2021/22 levy process.

Contingent assets

Trustees certifying contingent assets should note that:

• the PPF will not require hard copies of supporting documentation. These should be submitted by email.
• standard form agreements have been updated with effect from January 2021 to allow parties to new agreements to choose either a non-exclusive jurisdiction clause or an English courts exclusive jurisdiction clause. This change has been made in connection with the end of the Brexit transition period. The PPF will not require all existing contingent assets to be re-executed to reflect these changes. However, if parties to agreements entered into before 1 January 2021 wish to amend existing jurisdiction clauses to provide for the exclusive jurisdiction of the English courts, this will be an acceptable change and will not prevent recognition of the contingent asset. Affected parties should discuss this issue with their legal advisers. 
• when assessing the amount of realisable recovery, the PPF expects consideration to be given, in appropriate cases, to the potential effect of ‘super priority’ creditors. This relates to new restructuring tools introduced under the Corporate Insolvency and Governance Act. The PPF expects the number of schemes with contingent assets affected by this to be limited. Read our briefing on the new tools.

Commercial consolidators

The PPF is also consulting on draft guidance on the levy rules for commercial consolidators. It is aimed at those involved with establishing and running consolidator schemes.

View the consultation (the deadline for responding is 16 February 2021). 

Read the draft guidance.

GMP equalisation: upcoming industry guidance

The industry GMP Equalisation Working Group has provided an update on upcoming guidance in 2021:

• Tax implications: this is expected by the end of February 2021. 
• GMP conversion: this is expected by the end of April 2021. 
• Communications: further guidance on communications at the implementation stage is expected, but no timing has been provided.
• Anti-franking: new examples, to supplement the existing methodology guidance, are expected in Q2 2021. 
• Transfers: guidance on equalising past CETVs is underway; there will be an update on timing in Q1 2021.

Read the update.

Overseas transfer charge: Gibraltar

New regulations update an exclusion to the overseas transfer charge, so that this continues to apply to a qualifying recognised overseas pension scheme established in Gibraltar. The regulations come into force on 18 February, but will have retrospective effect from 31 December 2020, correcting a previous omission.

View the regulations.