Pension schemes failing to manage climate risk

Written by Lori Campbell on 7th Feb 2020

Pension schemes are failing to manage the financial risk of climate change, reveals a new report.

The study by the UK Sustainable Investment and Finance Association (UKSIF) found that only a third of pension trustees have complied with legal transparency requirements. It is now calling on the Pensions Regulator to carry out an urgent review.

Ben Nelmes, head of public policy at UKSIF, said: “Trustees are responsible for ensuring that millions of UK workers’ retirement savings are managed responsibly; they must have a policy to manage any kind of financial risk, including from climate change.”

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A change to the law in 2019 means trustees must publish their approach to protecting people’s pensions from the financial risks of climate change and other issues. UKSIF’s report found that while the majority of pension scheme trustees believe Environmental, Social and Governance (ESG) issues will negatively affect their savers’ assets, most have “thin and non-committal” policies for managing ESG financial risk.

Pension schemes have in recent months faced increasing pressure to consider the effects of climate change within the sector.

Last month the Brunel Pension Partnership threatened to sack investment managers that failed to reduce their exposure to climate risk. It condemned the financial system as “not fit for purpose” when it comes to addressing the issue. This followed the Bank of England Governor Mark Carney’s stark warning that climate change poses a huge risk to pension funds.

UKSIF is now calling on the government to set up a central registry – that can be viewed by the public – to host trustees’ policies on ESG issues.

Nelmes said: “Our findings suggest that many trustees have failed to comply with their legal requirements to publish their approach to managing material environmental, social and governance risks. The Pensions Regulator should launch a thematic review to investigate whether the industry as a whole is fulfilling its responsibilities under the law and to savers.

“We may take action ahead of this against schemes where a failure to engage with climate risk and other ESG requirements appears to be part of a pattern of wider governance failings.”

The government and regulators are being urged to provide trustees with more guidance and materials to educate them on how to manage climate-related financial risk. UKSIF found evidence that suggests trustees lack the expertise or knowledge required for managing financially relevant ESG risks.

UKSIF looked at a sample of 70 pension schemes, which was expanded after evidence of non-compliance was discovered, to give a sample of 30 Self Invested Personal Pensions (SIPs) from the schemes.

Nelmes said: “Trustees must be transparent about how they manage people’s pension savings, but too many schemes do not make the right information publicly available.” He said the Pension Schemes Bill needs to be amended when it goes through Parliament to create a registry and let savers see how their money is being managed.

See our Good Guide to Pensions for everything you need to know on changing your pension for the good of your pocket and the planet.