Regulator’s failure to mention climate risk in new funding code a ‘glaring omission’

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In December 2022, the Pensions Regulator published a series of documents which will underpin the new funding regime for Defined Benefit pension schemes.

These included:

  • A second consultation on the DB funding code
  • A draft of the proposed new funding code
  • A consultation on ‘Fast Track’ and TPR’s new regulatory approach
  • A response to the first consultation on DB funding.

However, despite publishing nearly 200 pages of proposed funding rules and consultations, the vital issue of climate risk received virtually no attention. None of TPR’s own documents included reference to climate change and the one mention of climate change was in the response to the first consultation – and was included because people who responded to the consultation said this was an important issue.

A key feature of the new funding regime is the concept of ‘integrated risk management’. This means that schemes should look holistically at all risks associated with the scheme. This includes, for example, risks associated with their investment strategy, the risk that the sponsoring employer might become insolvent, and how these risks might interact. It should also include consideration of how climate change (and measures taken to mitigate climate change) could affect both the scheme’s investments and the security of the sponsor covenant, to inform the funding decisions taken.

This omission stands in stark contrast to the Regulator’s own three year ‘Corporate Plan’ for the period 2021-24 which identifies as a key issue:

“DB funding and the importance of active and responsible stewardship, particularly around climate change”.

The Plan goes on to promote TPR’s own climate change strategy which “… details how we intend to help trustees meet the resulting challenges, managing risks appropriately”.

It is therefore all the more surprising that climate risks do not receive any reference in the proposed funding code and supporting documents.

LCP are concerned that if TPR is not explicit in this document about the importance of integrating climate considerations, trustees and schemes may not give this issue the priority it deserves. LCP is calling on TPR to highlight its key expectations on integrating climate risks into covenant, funding and investment risks in the code – lending more weight to its already-published guidance in this area, and ensuring that climate considerations are an integral part of key strategic decisions rather than an afterthought. Without this, the systemic risk in the UK DB pension system arising from vulnerability to the financial impacts of climate change is unlikely to be adequately addressed.

Commenting, Claire Jones, partner at LCP said: “Given the vital importance of climate change as an issue when assessing risks around investments and around the strength of the employer covenant, it is a glaring omission for TPR not to mention climate risk at all in its proposed funding code. If schemes are truly to adopt an ‘integrated’ risk management approach, all material risks need to be considered and this must include climate risk”.

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Notes to editors:
1. TPR’s new funding code and consultation documents can be found at: Draft defined benefit (DB) funding code of practice and regulatory approach consultation

2. TPR’s three-year corporate plan can be found at: Corporate Plan 2021-24