Mandatory transition plans for pension schemes: coming soon?

In its manifesto, the new Labour government committed to introduce mandatory transition plans for UK pension schemes that align with the 1.5°C goal of the Paris Agreement. This could be a significant change, requiring schemes to take much stronger action in relation to climate change.

In this blog, I explore what we currently know and what to watch out for as Labour’s plans take shape.

What has Labour said?

Labour’s election manifesto said:

“Labour will make the UK the green finance capital of the world, mandating UK-regulated financial institutions – including banks, asset managers, pension funds, and insurers – and FTSE 100 companies to develop and implement credible transition plans that align with the 1.5°C goal of the Paris Agreement.”

What is a transition plan?

“A net-zero transition plan (NZTP) is a set of goals, actions, and accountability mechanisms to align an organization’s business activities with a pathway to net-zero GHG [greenhouse gas] emissions that delivers real-economy emissions reduction in line with achieving global net zero.”

…is the definition used by Glasgow Financial Alliance for Net Zero (GFANZ), the umbrella organisation for net zero initiatives such as Net Zero Asset Managers (NZAM).

So, in essence, a transition plan is an organisation’s plan for reaching net zero emissions.

Other, more general, definitions exist that refer to a transition towards a lower-carbon economy rather than net zero emissions. However, as Labour’s manifesto refers to alignment with the 1.5°C goal, this suggests that they will require transition plans consistent with reaching net zero emissions no later than 2050.

How does this fit with existing climate requirements?

A focus on transition plans would mark a subtle, but potentially transformative, shift in emphasis from the existing climate requirements for occupational pension schemes – shifting from an “outside-in” to an “inside-out” perspective.

The current requirements¹ focus on identifying, assessing and managing climate-related risks and opportunities to pension schemes. This “outside-in” perspective views climate change as something that is happening outside the pension scheme and trustees must manage their scheme’s response to it.

Transition plans flip that around and adopt an “inside-out” perspective. This would focus instead on reducing the impact that an organisation has on climate change, by reducing its own greenhouse gas emissions and influencing others to do the same.

Transition plans therefore complement the existing requirements by focusing on reducing risks rather than just navigating them. This is illustrated by this infographic from GFANZ:

What guidance is already available?

Various organisations have developed guidance and other materials on transition plans, including:

• In 2021, the Taskforce on Climate-related Financial Disclosures (TCFD) issued guidance on transition plans, to supplement its main disclosure recommendations.
• In 2022, GFANZ published recommendations and guidance on NZTP for financial institutions and real-economy businesses.
• In 2023, the UK’s Transition Plan Taskforce (TPT) launched a disclosure framework for transition plans, followed by asset owner guidance in 2024.
• In 2024, the Paris Aligned Investment Initiative updated its Net Zero Investment Framework (NZIF), which is widely used by investors to set targets and produce net zero strategies and transition plans.

These initiatives are complementary, with TPT building on the work of GFANZ, which in turn is built upon the TCFD’s recommendations.

The guidance is extensive, with a large volume of material, much of it intended to be suitable for a wide range of organisations, including both companies and financial institutions. There is therefore considerable work for the pensions industry to do, to develop an approach to transition plans which is relevant and proportionate.

What are the key features of transition plans?

GFANZ and TPT have both adopted a five-theme framework:

1. Foundations – this sets the strategic ambition of the transition plan, eg net zero emissions by 2050.
2. Implementation strategy – this sets out actions to be taken in the short-, medium- and long-term to achieve the ambition, such as changes to investment processes.
3. Engagement strategy – this sets out actions to influence others in support of the ambition, for example investee companies, asset managers and consultants.
4. Metrics and targets – this mirrors one of the TCFD pillars, covering metrics and targets that support the ambition.
5. Governance – this also mirrors a TCFD pillar, covering matters such as roles, responsibilities and training.

I would expect pension schemes to focus on themes 2 and 3, ie the action-related ones. There are three main levers for action in the Paris Aligned Investment Initiative’s Net Zero Investment Framework:

• Aligning portfolios with net zero pathways, by increasing the proportion of assets which have credible net zero transition plans.
• Engaging with issuers and other stakeholders, usually through investment managers, to encourage them to set and implement credible net zero transition plans.
• Investing in climate solutions (such as clean energy, energy efficiency and sustainable agriculture) that are needed for a net zero economy.

These all aim to reduce real world greenhouse gas emissions and, if successful, will also reduce the scheme’s portfolio emissions.

What should we look out for?

Here are three things to watch out for as Labour release more details about their plans. These will determine how significant mandatory transition plans will be for the UK pensions industry:

1. Which schemes will need to produce transition plans? I hope they will only be required from larger schemes. I would like eligibility to be based on risk exposure, for example by excluding gilts and LDI when identifying which schemes meet the size threshold. Most UK pension assets could be captured through requirements that cover just a few hundred schemes.
2. How prescriptive will the requirements be? The current TCFD requirements for large schemes have proved onerous due to the large volume of guidance, which sets out many things that schemes “must” or “should” do or disclose. I really want to see any new rules being principles-based, with fewer specific requirements and expectations, and more focus on action than disclosure.
3. How will this fit with trustees’ fiduciary duty? A key question is how the government will ensure that implementing a transition plan (ie aligning with net zero) is aligned with trustees’ duties to members. I believe this will require clarification that fiduciary duty allows trustees to take a longer-term perspective and consider an outside-in (impact) perspective as well as an inside-out (risk management) perspective. It must also ensure that trustees are not forced to stick to their plan if it ceases to be appropriate.

What should I do now?

I am keen to see Labour start to implement its transition plan commitment.

We may learn more about its intentions through two reviews that DWP was due to carry out this year: clarification of trustees’ fiduciary duty; and a review of the TCFD requirements for larger schemes. It is possible that the new government will abandon them, but that would be a missed opportunity to address some of the challenges that currently face trustees wanting to take action on climate change. We have written elsewhere about the changes we would like to see to fiduciary duty and the TCFD requirements.

The world is not currently on track for the internationally-agreed 1.5°C goal and this poses a systemic risk to members’ benefits. The only way this risk can be avoided is through collective action. I think an effective transition plan regime, which is focussed on action and not reporting, is a vital part of the solution.

In the meantime, trustees should review the real-world actions they are taking to reduce climate risk and consider what else they can do.

¹ Both the mandatory “TCFD" requirements for schemes with £1bn or more of relevant assets, and master trusts, and the expectations set out in the Pensions Regulator’s General Code of Practice for all schemes with at least 100 members.