Pensions Bulletin 2024/15

• Industry expresses concern at Regulator’s Statement of Strategy proposals
• Pensions Regulator publishes latest review of trustee climate-related disclosures
• Net zero – transition plan resources published
• Pensions dashboards – annualised accrued value calculations guidance issued for DC pots

Industry expresses concern at Regulator’s Statement of Strategy proposals

The deadline to respond to the Pensions Regulator’s information gathering proposals to enable it to regulate the funding of DB schemes under the new regime (see Pensions Bulletin 2024/09) has now passed, and one clear message coming from those who have responded is a concern that what is being requested is potentially far too onerous and also not necessary for the Regulator to carry out its expanded role.

For example, the Association of Consulting Actuaries calls for a lighter touch approach for now, referencing the Regulator’s proposals as a “data tsunami”. It says that what the Regulator is requesting is likely to lead to significant additional costs as a number of parties will need to be involved in gathering, entering, agreeing and submitting the information. The ACA highlights the various data sets running over 100 years, particularly the cashflows, saying that it doesn’t see any of these as being necessary for the Regulator to fulfil its role.

The Society of Pension Professionals has taken a similar line, also asking for relatively simple changes to reduce scheme burdens and for the Regulator to consider making changes that better reflect the needs of particular types of scheme.

The Association of Professional Pension Trustees expresses “grave concern” in its response about the need to and value of collecting “endless items of data”, calling for a “material cull” in the proposed requirements. It concludes that “to impose onerous additional data requirements on those schemes that are now well-funded and largely de-risked seems to be disproportionate regulation that conflicts with Government regulatory policy”.

LCP has also responded to the consultation calling for a reduction in the proposed burden, such as by having a substantially abbreviated submission template for schemes which are very well funded, ensuring the system for schemes to provide information is as easy to use and up to date as possible and to provide clear guidance on where schemes can be proportionate or pragmatic in providing the information.

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Pensions Regulator publishes latest review of trustee climate-related disclosures

The Pensions Regulator has published its second review of climate-related disclosures that are required to be made by trustees of the largest schemes, with the aim of helping raise standards across the industry. This review comes a year after the first review (see Pensions Bulletin 2023/13).

The 2024 review covers a selection of reports (13 DB schemes, 13 hybrid schemes, 3 single employer DC schemes and 1 master trust) for scheme year-end dates between 1 October 2022 and 30 September 2023, representing about 10% of the total reports for that period.

The review begins by setting out some overarching observations on the reports analysed. These include: that plain English summaries for members are to be encouraged; it is acceptable to re-use last year’s wording for things that have not changed and; it is helpful to include the scheme information at the beginning of reports.

The review then discusses under six headings the good practice that was observed, as well as areas that could generally be improved on. They include the following:

Governance

Strengths include summarising trustee training carried out during the reporting period, establishing explicit climate-related investment beliefs or a climate change policy and including clear descriptions of the governance framework.

Issues include generic wording such as the trustees ‘regularly’ discuss climate change or 'regularly' assess each service provider, giving the Regulator less confidence on the quality of the governance in these areas – the Regulator wants specifics. The Regulator also wants to see more evidence of how advisers are assessed for their climate competencies.

Strategy

Good practices were observed of identifying material climate-related risks and opportunities specific to different asset classes, and climate-related risks affecting the liabilities or funding of DB schemes.

The main deficiency flagged is that covenant issues were omitted entirely for some DB schemes or only covered by a very high level concluding comment or a link to the sponsor’s own assessment without any explanation of the trustees’ own views. The Regulator notes that the statutory guidance includes a mandatory requirement for trustees to consider the impact of climate-related risks and opportunities on the sponsoring employer’s covenant.

Scenario analysis

The review includes a discussion about the current limitations of scenario analysis, particularly where these do not fully capture the physical impacts of climate change. Amongst the recommendations for improvement are considering using a qualitative analysis based on clear narratives while quantitative analysis is still developing in the market.

Risk management

The main deficiency flagged here is that some reports do not include any information on how, if at all, the trustees used stewardship to help manage climate-related risk. There is a reminder that the statutory guidance requires trustees to explain whether they have done so.

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Net zero – transition plan resources published

The UK Transition Plan Taskforce (TPT) has launched its final set of transition plan resources whose intention is to assist businesses prepare plans on how to achieve net zero targets. The materials include:

• Sector-specific transition plan guidance for asset owners, asset managers, banks, electric utilities & power generators, food & beverage, metals & mining and oil & gas

• Sector summary guidance, with high level guidance for 30 sectors of the global economy

• Guidance on how to undertake a transition planning cycle

• A paper on the opportunities and challenges of transition plans in emerging markets and developing economies

• Independent advisory pieces on adaptation, nature, just transition and small to medium enterprise, exploring how transition planning can extend beyond realising net zero

These materials were welcomed by the Pensions Regulator as it launched its second review of climate-related disclosures (see article above).

The TPT was established by HM Treasury and announced at COP26 in Glasgow in November 2021.

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Pensions dashboards – annualised accrued value calculations guidance issued for DC pots

The DWP has published short guidance from the Financial Reporting Council to assist those who need to turn DC pot values into annual income equivalents for the purpose of display on the forthcoming pensions dashboards.

The requirement to produce “annualised accrued values” is not new, having been set out in the Pensions Dashboard Regulations laid before Parliament in final form in November 2022. However, the value data aspect of these regulations (for all scheme types) was somewhat outline in form, which presumably explains the need for this guidance in relation to DC pots.

The guidance itself is to the point, explaining how when dividing the accrued pot value by an annuity rate, the detail of the approach that could be taken, with a number of references to the FRC’s AS TM1 which is used for statutory money purchase illustrations, can ensure that the resulting annualised accrued values are consistent with their equivalent in SMPI calculations.

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This Pensions Bulletin does not constitute advice, nor should it be taken as an authoritative statement of the law. For further help, please contact David Everett at our London office or the partner who normally advises you.

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