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Pension Schemes: Guidance

Volume 828: debated on Monday 13 March 2023


Asked by

To ask His Majesty’s Government, further to the report by Pensions For Purpose One year onTCFD reporting for pension funds, published on 1 February, whether they intend to produce guidance for pension schemes in relation to their fiduciary duties.

My Lords, by October 2022 occupational pension schemes with assets above £1 billion fell into scope of DWP’s requirements to report in line with the task force on climate-related financial disclosures, the so-called TCFD recommendations. The department published guidance alongside the requirements to help pension schemes improve the quality of governance and manage climate risk. DWP committed to review the requirements in late 2023 and will consider whether pension schemes require additional guidance in relation to their fiduciary duties.

My Lords, I thank my noble friend for that Answer and declare my interests as set out in the register. The Pensions for Purpose report highlighted a dilemma, in which some say that considering the real-world impacts of pension fund investments, including green or net-zero assets, infrastructure and housing, could be portrayed as trading off risk-adjusted returns against doing good. But does my noble friend agree that this is a false dichotomy? A failure to consider the climate and nature impacts of investments is likely to increase long-term risks and reduce returns, as opposed to pension funds that typically look at short-term performance measures. Can my noble friend ask relevant Ministers in the Treasury whether they will consider accepting relevant amendments that have been laid to the Financial Services and Markets Bill?

Well, I will not be drawn on that by my noble friend, but the comments that she makes are broadly correct. It is very important that pension schemes, particularly those for purpose, encourage investments that align with the environment and society, and that includes climate change. I believe that the report, One Year On, outlines some pointers, insights or challenges. For example, most funds are using their investment consultants, while some are not yet using or including carbon offsets in their TCFD reports, but nothing in the findings so far is unfamiliar to DWP. We know there is work to do to improve the reports and build an element of expertise across the industries more generally.

My Lords, I welcome the report. The question is whether the advice can effectively come from the Government against the background—I hope the Minister will agree—that it is the members’ money that is intended to provide them with a retirement income and should be used in accordance with their wishes and views. Can the Minister confirm that that is his view of how money in pension funds should be used?

I think it is important that the right advice is given. I start by saying that this is pretty ground-breaking, because the UK is the first country in the world to make occupational pension schemes consider, assess and report on the financial risks of climate change. In terms of what I would call “the push”, we have consulted with the pensions industry and certainly think it is right that guidance is given. For example, my department has introduced guidance alongside the TCFD requirements to help pension schemes understand how to identify, manage and assess climate-related risks and opportunities.

My Lords, actually, I think we were second after New Zealand; we were the first in the G20. The Financial Conduct Authority recently surveyed TCFD returns and found weaknesses in two areas: data or metrics, and targets. These are key areas. How will the Government try to put that right? Secondly, will the Government move forward, as I think they have said they will, with external assurance—in other words, audit—of those returns, to make sure that we banish greenwashing in this area?

The noble Lord makes a good point. He has pointed out a few issues that were in the initial outlines. He mentioned data, which is an issue. Metrics and the use of implied temperature rises—for example, carbon offsetting and scenario planning—are definitely challenges that are being worked on domestically and internationally. As I said, we are the first country in the world to do this. It is good work, which needs to be built on.

My Lords, I declare an interest as a trustee of the Parliamentary Contributory Pension Fund. I hope that those who are members have received the annual report and will recognise the performance of our fund, which grew from 104.3% in April 2020 to 130% in April 2022. However, that is not really the key point. My key point is that a fair number of pensions—though not our pension—have suffered from LDI and the chaos in the financial markets in September last year. Against that background, I suggest to my noble friend on the Front Bench that all those who are affected have more than enough on their plate at this time tackling those challenges, without having any further advice from anywhere else.

Well, I do not really agree with the general points my noble friend has made. The main thing is that the regulator has a particularly strong role here, and it plans to publish its findings on what we are doing soon to provide schemes with examples of good practice. The regulator has found so far that most reports were published on time. This is to do with the publishing of reports. Almost all were substantial documents showing trustee engagement. In terms of my noble friend’s point about LDI, he will know that much progress has been made, led largely by the independent Bank of England working closely with the Treasury.

My Lords, I declare my interest in the register as a trustee. The report raises key questions about fiduciary duty. In summary, we need clearer guidance from the Government on three key issues: the extent to which environmental and social factors form a core component of investors’ fiduciary duties; the fact that pension scheme fiduciary duties are not a substitute for what government should do; and the fact that government desire for more pension fund investment in UK productive investment has to align with pension trustee fiduciary duties. Can the Minister confirm that, when issuing more guidance on the fiduciary issue, they will address these particular three issues where the contours of fiduciary duty need clarity?

As I have said before, it is the case that more progress needs to be made, and the noble Baroness has much experience in this field. Let us start with climate change, which poses major financial risk to pension schemes and savers’ returns, with almost £2 trillion in assets under management. I reassure her that pension schemes in scope of the DWP’s requirements, as I think she will know, must produce the annual TCFD report, which is based on four key pillars: governance, strategy, risk management, and metrics and targets. That might be five, but I think it is four.

My Lords, I declare my interests as set out in the register. Has this afternoon’s discussion not illustrated that there is a lack of clarity about how fiduciary duties are interpreted in terms of the long-term risks and possibilities of climate change-related investments? Therefore, would the Minister reconsider having a conversation with his colleague, the noble Baroness, Lady Penn, about the amendments on this point to the Financial Services and Markets Bill?

I can certainly pass the message on to my noble friend. On fiduciary duty, the noble Baroness will know that trustees have a duty to act overall in the best interests of members. This has been traditionally interpreted as covering risk-related returns as well. We made clear in our 2022 stewardship guidance, perhaps as an assurance, that trustees should be considering whether climate change risk is financially likely to be a material risk.

My Lords, the report has said that, since the law was changed to require pension funds to do climate reporting as a way to nudge the companies and assets in which they invest to do better, two broad problems have emerged. First, the data out there are not consistent in timeframes or formats, or across asset classes or managers. Secondly, the regulatory regime seems to focus more on positioning pension funds than on the climate transition plans of the companies; as the report puts it,

“the world needs greening, not the pension fund”.

So will the Government look again at this?

Not only will we be looking again, but this is an iterative process. As I have said, we are yet to come back on the report, One Year On, but we will come back soon. I also reiterate the fact that we are the lead in the world; I will have to check the figures from the noble Lord, Lord Teverson. For example, since our department introduced TCFDs, over 70% of occupational pension schemes—a value of £1.4 trillion—are now subject to climate disclosure, and over 80% of scheme members, some 20 million people, will be able to access their pension schemes’ disclosures on climate risks and see how they are being managed. That is being published for the first time.