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Climate change – shining more light on pension funds

The proposal

There is a “climate emergency”[1] and it poses material financial risks that could threaten the security of members’ benefits. My contention is that significant pension funds should be obliged to publically disclose how they are managing their climate-related financial risks. They can do this by making available to the public their report and accounts, and, where not already covered by this document, disclosures showing the extent to which they have followed the recommendations of the FSB TCFD[2].

Pension funds are already obliged to produce accounts and a SIP, and make them available to their members on request. A few large pension funds already publish their accounts on the web, and others do so but using a log-in procedure so the general public is excluded. Recent regulatory changes mean that pension funds will soon have to publish their SIPs and information on their stewardship practices.

The justification

Public disclosure in one sense is like a powerful, informed commentator looking over the shoulders of the trustees as they make their deliberations. They know that they may be called to account by public opinion and required to justify decisions. In practice this is not likely to happen but the knowledge that stewardship will be in the public domain serves to focus attention and give climate issues the priority they deserve.

Occupational pension funds are of course private trusts, established by employers for the benefit of their employees, and the public interest may be questioned. However, these pension funds have proliferated and accumulated as a result of generous tax reliefs, financed by the public at large. Furthermore, their current magnitude at over £2 trillion means they have a significant influence on the UK economy. These sentiments echo those of the Pensions Minister, Guy Opperman, in his September 2018 foreword to the Government response to a pensions investment consultation.

As a result of the regulations issued following the above consultation, by 1 October 2019 the SIP produced for DC pension funds must be publically available, whether via a website or other means. This will now be extended to DB pension funds from 1 October 2020. However, there is presently no requirement for accounts or any TCFD disclosures to be published.

Existing practices

The June 2017 TCFD recommendations are voluntary, and still in a relatively early stage of implementation. In June 2018 the UK Parliament’s Environmental Audit Committee produced a major report on green finance and sustainability which called for all listed companies and large asset owners (which would include pension funds) to report in accordance with TCFD on a “comply or explain” basis. It also noted the present sporadic approach to public disclosure by large pension funds.

The TCFD recommendations have received widespread support from around the world, according to the latest June 2019 TCFD status report , including from the UK Government, the PRA and TPR. The Government’s July 2019 Green Finance Strategy takes this a stage further by:

jointly establishing an industry group with TPR to develop TCFD guidance for pension funds with a view to “putting it on a statutory footing during 2020”;

establishing a joint taskforce with UK regulators to ensure a co-ordinated approach on climate-related financial issues, including exploring making reporting mandatory;

expecting “large asset owners” (pension funds?) to be disclosing in line with TCFD by 2022.

The TCFD recommended that their disclosures should be incorporated in mainstream financial statements, rather than being a separate report, so that the context and significance can be appreciated.  However this only works for pension funds if they also provide public access to their accounts. It is not clear whether public disclosure is intended in the Green Finance Strategy measures summarised above.  

Many large pension funds have signed up to the UN PRI which commits them to a set of principles of responsible investing allowing for environmental, social and corporate governance considerations. These principles do not however require disclosure of the potential financial impact of climate risk, and a cursory examination reveals that pension funds who have signed up do not necessarily make their accounts and SIPs publically available.

The AMNT formally complained to the FCA in May regarding the inflexibility displayed by some investment managers in voting practices, for example in relation to climate, remuneration and diversity issues. Shareholder voting and stewardship in general will be important in ensuring proper scrutiny of TCFD implementation.

In relation to personal pensions, further disclosures will need to reflect their different structures. Independent Governance Committees currently provide independent oversight of the value for money of workplace contracts. The FCA is currently consulting on extending the IGC brief to include reporting on ESG policies including climate change.

The bottom line

Proposing further requirements for pension funds should not be undertaken lightly in view of the additional burdens that have been applied over many years. However, no additional documents are being proposed; only that the report and accounts, and, where not already covered by this document, disclosures showing the extent to which they have followed the recommendations of the FSB TCFD, should be publically available through a website. Recognising the potential burden for smaller schemes with fewer resources it should only apply to pension funds with either say more than 1000 members or £100 million of assets.

Pension funds are major investors. It makes a bit of a mockery of the work of the TCFD if such a large proportion of asset owners, that is pension funds, make no public disclosures themselves.

These are the personal views of Paul Meins, independent consulting actuary, member of the Research & CPD Committee of the Resource & Environment Board of the Institute and Faculty of Actuaries, and former Vice Chair of the Board.

Also the author of “Decoupling economic growth from environmental impact and resource use?” available here and lead author of “Decarbonisation: A Briefing for Actuaries” published by the International Actuarial Association, September 2018 available here.                                                                                                                                               

Acknowledgements: thanks to Claire Jones and Chris Paterson for their helpful comments on drafts of this paper (but it does not necessarily represent their views).


[2] Abbreviations 

AMNT Association of Member Nominated Trustees
DB Defined benefit
DC Defined contribution
FCA The Financial Conduct Authority
FSB G20’s Financial Stability Board
IGC Independent Governance Committee
PRA Bank of England’s Prudential Regulation Authority
PRI UN Principles of Responsible Investment
SIP Statement of Investment Principles
TCFD FSB’s Taskforce on Climate Related Financial Disclosure
TPR The Pensions Regulator