Articles - Much still to be done to adapt pensions to climate change

Pension schemes in the UK still have much work to do if they are to adapt to the challenges of climate change, a report from The Pensions Regulator has warned. In its climate adaptation report TPR says too few schemes give enough consideration to climate-related risks and opportunities, which means investment performance and saver outcomes could suffer. The report explains that while schemes are more engaged, according to a TPR survey less than half of defined contribution schemes (43%) took account of climate change when formulating their investment strategies and approaches when quizzed in 2020.

 A survey of defined benefit schemes in the same year showed more than half (51%) had not allocated time or resources to assessing any financial risks and opportunities associated with climate change.

 TPR states while it does not underestimate the scale of the challenge for occupational pension schemes it adds that practices are rapidly evolving, and trustees and savers are increasingly more engaged with the need to consider climate-related risks and opportunities.

 Charles Counsell, TPR’s Chief Executive, said: “The pension industry still has much work to do to build resilience and assess climate-related risks and opportunities.

 “A rapidly warming world brings the risk of more frequent fires, floods or extreme weather – potentially causing the loss of physical assets and supply chain disruption.

 “Unless properly managed, these risks have the potential to impact scheme funding, employer covenant and leave some savers facing a poorer retirement.

 “Our adaptation report shows much more needs to be done.”

 Mr Counsell said trustees should be considering climate change in their scheme’s investment strategies, allocate sufficient time and resources to assessing financial risks and opportunities associated with climate change and ensure process used to manage those risks and opportunities are robust.

 He added: “Our report recognises that practices are evolving, and trustees – and savers – are more engaged with the need to consider climate risks. We remain convinced that a landscape of resilient pensions schemes that protect savings from climate risk is entirely within reach.”

 The report adds that trustees could see a positive impact from considering climate change in their investment and scheme governance, including on expected returns and the capacity to reduce risk.

 For example, there may be opportunities to access new markets and new technologies related to the transition to a low-carbon economy.

 The report acknowledges that lack of climate-related data could be a barrier for schemes adapting to climate change.

 According to feedback to TPR’s supervision teams, industry has warned that availability of climate-related data can be a significant issue for trustees, and this may be a barrier to developing plans to make schemes more resilient.

 TPR explained it expected to see improvements in data quality and modelling capabilities as the financial system as a whole moved towards mandatory reporting of climate-related risks and opportunities.


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