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February 27, 2023

UK pensions regulator threatens fines in clampdown on schemes’ ESG disclosures

Polar bear on ice floe. Melting iceberg and global warming
Pension schemes in the UK are expected to take climate change into account when making decisions. (Photo: Photocreo/Envato)

The Pensions Regulator is increasing its scrutiny of pension schemes’ compliance with ESG disclosure rules.

Pension schemes will be contacted by The Pensions Regulator to confirm that the watchdog is assessing their “scheme returns” – within which they disclose information including the type of scheme they are and their size – to monitor their compliance with environmental, social and governance disclosure requirements, and warned that compliance failures may be met with fines.

In the UK, pension schemes are expected to take climate change into account when making decisions. Schemes with at least £1bn in assets must publish an annual Task Force on Climate-related Financial Disclosures report.

The TCFD’s disclosure recommendations cover four thematic areas: governance, strategy, risk management, and metrics and targets.

The regulator is assessing whether schemes with more than 100 members, unless they are exempt, have published a statement of investment principles (SIP), which sets out their policies on how they invest. This includes “financial material ESG and climate factors”.

They must also issue an “implementation statement”, which explains how their SIP has been implemented.

“For many UK pension schemes of this size, this should not be onerous and has been in place for some time,” wealth manager Van Lanschot Kempen’s head of client advice, Arif Saad, told Sustainable Views.

“However, there is often a direct correlation between the size of a scheme and the amount of resource that is dedicated to these aspects. Therefore, it is possible that smaller pension schemes may be found not to have completed this to the standard that TPR would be happy with.” 

Schemes’ abilities to adequately report their ESG data may also rest upon the performance of their investment managers. Last year, pensions consultancy Hymans Robertson claimed that schemes’ private market managers seemed “generally unprepared to support clients” with the information they need to effectively meet their TCFD obligations.

Hymans Robertson approached 59 managers and 137 funds in a bid to analyse the level of data used by its clients that managers were able to provide on their funds across private debt, private equity, real estate and infrastructure. 

Of those approached, 44 per cent did not respond to the consultancy’s request. Forty-two per cent responded on all funds, while 14 per cent only provided information on some funds.

“Data availability is particularly poor within private debt mandates, with no evidence that managers are currently able to report on carbon emissions,” the report said. “Improvements are drastically needed.”

Regulatory fines

TPR will launch a regulatory offensive in the spring to check whether scheme trustees are indeed publishing the correct ESG data. It is currently assessing the SIP and implementation statement (IS) data shared via defined contribution (DC) schemes’ 2022 scheme returns. Under a DC arrangement, both an employer and an employee contribute towards a saver’s “pot”.

“Initial analysis has highlighted [that] a number of schemes did not provide valid website addresses of the SIP and IS statements, and TPR will be communicating with these schemes next month,” the regulator said. 

Cartwright senior investment consultant Adam Gregory told Sustainable Views that “it is a dead easy exercise for TPR to spot non-compliance based on scheme return data”, adding that there is “no hiding place for trustees”.

“I expect there may be some smaller schemes out there that have a low governance approach and who may fall foul of TPR,” he said.

“What is far more difficult for TPR is policing the content of SIPs and ISs. They have high aspirations as to the quality and depth of these and I would expect many schemes  – especially smaller ones – to fall short.”

TPR will publish a statement on TCFD reports in the spring and conduct a review of SIP and IS information in the summer, which will be shared to highlight good practice.

The regulator can issue fines of up to £50,000 if schemes fail to issue their SIP or IS. Defined benefit and hybrid schemes have until March 31 2023 to submit their scheme returns this year, while notices for DC schemes’ returns will be issued in the summer. 

Under a defined benefit arrangement, an employee’s retirement income is based on their years of scheme membership and the salary they have earned, while a hybrid scheme typically has attributes of defined benefit and defined contribution schemes.

“These reporting disclosures represent compliance with the basic requirements in relation to ESG and climate change, so it’s disappointing some trustees are failing to meet them,” TPR’s executive director of frontline regulation, Nicola Parish, said.

“Trustees who fail to comply risk us taking enforcement action against them and I expect to see an improvement in compliance levels.”

Paul Lee, head of stewardship and sustainable investment strategy at pensions consultancy Redington, told Sustainable Views: “This seems a measured and proportionate step from the regulator. They are threatening fines, but only if schemes have not published their SIPs or ISs. 

“At the moment, they are looking to locate and highlight best practice across the industry in these disclosures, which is a good step to encourage improvements and to help schemes learn from each other.”

Lee said that both TPR and the UK government want schemes to “demand more of their investment managers by way of stewardship”.

“This matters because it’s only in this way that pension scheme ambitions on net zero will be achieved in reality,” he said.

A service from the Financial Times