Treasury Select Committee recommendations on Pensions and climate risk

The Treasury Select Committee has today published a report on “Net Zero and the Future of Green Finance” (Decarbonisation and Green Finance (parliament.uk)) which includes a number of recommendations of relevance to the pension industry.

A key observation from the Committee in the summary to its report says:

“There is a high level of inertia amongst consumers around defined contribution pension fund choice, with most remaining in the ‘default’ fund. The Treasury has been robust in its view that default funds should not be required to move to more green alternatives, but at the same time maintains that consumers should not have to switch out of the default to invest sustainably. The Government should resolve this apparent contradiction. The Treasury should report regularly on the proportion of pension holders in defined contribution pension schemes who remain in the default fund, and the extent to which those default funds are aligned with a path to Net Zero” (p4)

The Committee also noted the lack of member choice over investments in DB pensions and expressed concerns that new rules on climate reporting will not apply to small schemes. They said:

“117. Consumers who hold defined benefits pensions have no choice as to how their assets are allocated. They rely upon their trustees. We note that previous attempts to get defined benefit schemes to acknowledge Environmental Social and Governance concerns have not been entirely successful. In its phased approach to implementing the regulations, the Pensions Regulator will need to consider how to reach smaller pension schemes. The draft regulations appear to exclude the smallest trust schemes. However, when their effects are aggregated, they may still have an impact on meeting the net zero target. In responding to this Report, the Government should set out how these smaller funds will be encouraged to integrate climate governance and reporting requirements” (p34-5)

Commenting, Claire Jones, partner and head of ESG at consultants LCP said:

“Default funds are already required to manage material financial risks and opportunities to members’ pensions savings – and this includes risks and opportunities relating to sustainability. We support measures that ensure defined contribution pension schemes are meeting this requirement. The default option is chosen to be appropriate for most members, with considerable effort taken to ensure it remains fit for purpose, so we would expect to see high proportions of members invested in the default”.