Pensions Bulletin 2024/05

Our viewpoint

Fiduciary duties and climate change – trustees should read this

In its March 2023 Green Finance Strategy the Government said that it would “engage with interested stakeholders on how we can continue to clarify fiduciary duty through a series of roundtables and a working group of the Financial Markets Law Committee (FMLC).

The FMLC has now published a paper which sets out latest legal thinking on pension trustee decision-making in the context of sustainability and the subject of climate change.  The paper is addressed to trustees to provide an understandable and very general explanation of the legal position and the difficulties and uncertainties that exist.

The paper describes the fiduciary and other duties that trustees have and sets out their decision-making responsibility, noting along the way that trustees will have advisers and investment managers but that trustees have ultimate responsibility for decisions; it also sets out the current law on the distinction between financial and non-financial factors.

The core of the paper looks at sustainability, which the FMLC says is integral to decision-making by trustees where it may affect financial return or risk, and concentrates on climate change as an important element of sustainability.  Some of the key points addressed are:

  • Trustees cannot just apply the current legislation and regulation about climate change and leave it at that, because to do so would not fully address the risks
  • Litigation risk is increasing (and may outlast the holding of an investment)
  • Financial factors such as climate change need to be considered at a number of levels: at the level of a specific asset or investment, at a portfolio level, and at the level of whole economies material to the pension fund
  • What might previously have been regarded as non-financial returns or risks may now need to be recognised as financial returns or risks, or as relevant to financial returns or risks
  • An investment decision may properly be viewed in the context of a wider strategy aimed at tackling sustainability risk to financial performance of all or part of the pension fund
  • It may be necessary to consider whether a strategy should reject shorter term gains because they create identifiable risks to the longer-term sustainability of investment returns in the fund
  • Some wider economic or systemic climate change-related issues may have been characterised as "too remote and insubstantial" in the past; now trustees will need to reappraise this in a context where, for example, physical, transition and litigation risks are apparent and material
  • With climate-change related risks that are systemic, it is unlikely that diversification alone of a portfolio will be enough to avoid all the risks in the same way that non-systemic risks might be diversified away from
  • Trustees may consider investments that are designed to be positive in their “impact” on sustainability and climate change, but the same considerations of financial risk and return apply as for other investments
  • Stewardship of investments may be material to achieving or maintaining (or improving) the balance of financial risk and return envisaged when the decision to invest was made

The paper also prompts trustees to consider what are applicable time horizons when making decisions, including a comment that where a buyout is envisaged climate considerations may still be relevant because the focus is still on benefit delivery.

The paper reminds trustees of the importance of following a proper process and taking (but not rubber-stamping) advice when making decisions.  It provides suggestions for identifying and taking into account all relevant factors, including seeking out contemporary thinking, not focusing too much on one matter, considering members’ views and exercising judgement.


This paper, produced by highly credible legal and non-legal experts, is an important summary of this complex topic.  It explains why a much wider range of climate considerations may be relevant to investment decisions than is typically recognised.  It also makes the legal position very clear: trustees should actively take climate change into account when taking any significant investment decision including setting strategy, agreeing investment principles and appointing managers.  As a result, all trustees should familiarise themselves with the paper’s content.

While the guidance in this paper is not binding on trustees, it does represent the latest legal thinking on this subject.

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Pensions Regulator reports on Capita cyber security breach

The Pensions Regulator has published a regulatory intervention report setting out how it worked with the pension administrator Capita when Capita suffered a cyber security incident in March 2023.

The report says that the Regulator worked closely with Capita to assess the risk to schemes and their members, quickly contacted the trustees of schemes administered by Capita (just under 400 pension schemes) to highlight the expectations set out in the Regulator’s cyber security guidance, and the steps it expected trustees to take, including communicating with members.  The Regulator also issued a statement on the incident in May 2023 (see Pensions Bulletin 2023/20).

The report reveals that there were a number of communications challenges as Capita sought to contact trustees and members affected, including contact details of schemes that Capita no longer administered, agreeing template wording for member communications, and where member communications were further delegated to other third parties.

The report says that the incident demonstrated the very real threat that cyber criminals can pose, with costs to Capita estimated at £25 million, as well as disruption to their operations and potential reputational damage.  The Regulator goes on to say that the incident shows the importance of having preventative measures in place and ensuring that trustees and their providers have robust cyber security and business continuity plans.  Separately, the Regulator has been putting in place a new Administrator Relationships initiative to engage directly with a small number of third-party pension administrators.

The Regulator concludes by setting out a number of key steps all trustees should take in the event of a cyber security incident and mentions once more the Regulator’s cyber security guidance which it updated in December 2023 (see Pensions Bulletin 2023/50).  It also repeats its message from December, asking trustees and scheme providers to report cyber incidents on a voluntary basis, so the Regulator can build a better picture of the cyber risk facing the industry and its members.


Although there are always lessons to be learned from events like this, this is not a “regulatory intervention report” as we have come to know them, mainly because the Regulator, as it itself acknowledges, “does not have direct regulatory grip over administrators”.  The report is therefore not about the Regulator taking Capita to task, but using the incident as a salient reminder of what trustees of all schemes should be doing, working with their administrators, to prepare for such an eventuality and to know what to do if they too suffer a data breach.

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Labour Party promises to review pensions and retirement savings

The Labour Party has published its Plan for Financial Services in which it announced a number of pensions matters that it would take forward should it be elected at the next General Election.

First up is that it will undertake an “in-Government pensions and retirement savings review” to evaluate whether the current framework will deliver sustainable retirement incomes for individuals.  A desire to ensure that pension savers are getting the best possible returns is mentioned alongside tackling the barriers to pension schemes investing more into UK productive assets.

Next is a desire to enable greater consolidation across all pension and retirement saving schemes, with the Pensions Regulator to be given new powers to bring about consolidation where DC schemes fail to offer sufficient value for their members.

There is also mention of an opt-in scheme for DC funds to invest a proportion of their assets into UK growth assets – split between venture capital, small cap growth equity, and infrastructure investment.


These are the broadest of brushstrokes, necessitating more detail as the General Election approaches to establish the extent to which Labour’s approach to pensions policy would differ from that of the current Government.

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Finance Bill now in the House of Lords

The Finance Bill containing, in its Schedule 9, the necessary measures to abolish the pensions Lifetime allowance completed its House of Commons’ stages on 5 February 2024, and after First Reading in the House of Lords on 6 February is expected to complete all its remaining stages there on 21 February.

In the Commons the Labour Party did not oppose the Bill, leaving it to the SNP and some Liberal Democrats to divide the House.  However, the Labour frontbench spokesman, James Murray, did criticise the Government for needing to have to return to a number of aspects of its pensions measures and correct them, which “clearly indicates rushed legislation that runs the risk of creating problems for all involved”.


The pensions legislation is clearly rushed, as we have observed on a number of occasions, and for those who have to examine it in detail, more and more errors are emerging, some of which we hope can be fixed by regulations that will become possible once Royal Assent is reached – perhaps as soon as the end of February.

The Labour Party has been remarkably silent on its intention to reintroduce the Lifetime allowance, which it made plain in its response to the March 2023 Budget, and on which one might have expected it to take a stand as the Finance Bill carrying out the actual abolition makes its way through Parliament.

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PPF levy ceiling increases once more

The overall pension protection levy “ceiling” for 2024/25 will be £1,349,215,811 – as set out in the Pension Protection Fund and Occupational Pension Schemes (Levy Ceiling) Order 2024 (SI 2024/101) made by the DWP on 30 January 2024.

This is an 8.2% increase on the 2023/24 ceiling due to there being significant growth in average weekly earnings in the year to July 2023.

The actual maximum levy the PPF can take in 2024/25 is further constrained by other rules and is substantially less than the £1.35 billion permitted by this particular Order.  The PPF is intending to raise £100m in 2024/25 (see Pensions Bulletin 2023/51).


The concept of an overall ceiling to protect levy payers made sense when the PPF was being designed some 20 years ago, but it has long since ceased to have any relevance.  But until the legislation governing how the levy is determined is overhauled, each year a meaningless number has to be determined and set out in regulations.

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Auto-enrolment parameters frozen again

The Government has published the analysis supporting its review of the earnings trigger and qualifying earnings band to be used for auto-enrolment purposes for 2024/25.  The earnings trigger above which individuals must be auto-enrolled will continue to remain frozen (as it has been since 2014/15) and the band of earnings on which minimum contributions are based will continue to be aligned to the Lower and Upper Earnings Limits for national insurance purposes.  Therefore for 2024/25:

  • The automatic enrolment earnings trigger will be maintained at £10,000 pa
  • The lower limit of the qualifying earnings band will remain at £6,240 pa
  • The upper limit of the qualifying earnings band will remain at £50,270 pa

The analysis states that freezing the earnings trigger will see private sector participation at 15.8 million in total.  The equivalent figure this time last year was 15.3 million.

Under the Government-supported Pensions (Extension of Automatic Enrolment) Act 2023, the lower limit of the qualifying earnings band may be removed by secondary legislation (and the age threshold reduced from 22 to 18).  The analysis says that the DWP intends to carry out a consultation on the detailed implementation of these measures at the earliest opportunity and report to Parliament before using the powers in the Act.


The £10,000 earnings trigger used to follow the income tax personal allowance (now standing at £12,570) and had this link been maintained significantly fewer people would come within the auto-enrolment net.  Its continued freeze at what the income tax personal allowance stood at in 2014/15 is resulting in the employer auto-enrolment duty becoming more widespread, especially as recent high inflation has pushed up earnings.

As to the auto-enrolment reforms, a consultation on which had been expected in autumn 2023 (see Pensions Bulletin 2023/37), it seems that this is either being pushed gently into the long grass, or is being lined up as a ‘good news’ story for the 6 March Budget.  Hopefully the latter, given the publication by the DWP of two Research reports, the first examining low earners and workplace saving and the second entitled engaging with pensions at timely moments.

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No change to the auto-enrolment DB and hybrid scheme alternative quality tests

There are to be no changes to the operation of the tests that employers can use to demonstrate that their DB or hybrid scheme is of sufficient quality for auto-enrolment purposes.  This is the main conclusion to the call for evidence issued in May 2023 (see Pensions Bulletin 2023/20) on which the DWP has now responded.

The DWP says in its latest triennial review that, on the basis of the evidence gathered, it has concluded that, in broad terms, the alternative quality tests continue to provide a simplified option and are suitable for the majority of DB and hybrid schemes who use them.  The call for evidence also covered an equivalent alternative test for CDC schemes on which the DWP is also satisfied that no change is necessary.  The DWP promises that the DB and hybrid tests will be reviewed at the same time as the consultation on implementing the measures set out in the Pensions (Extension of Automatic Enrolment) Act 2023 (see article above), and the CDC test will also be reviewed as the CDC regime develops,


The alternative quality requirements for DB and hybrid schemes have been in place since 1 April 2015 and were very much welcomed as a simplified form of testing for when DB contracting out came to an end the following April.  But every triennial review (and there have now been three) has concluded that nothing needs to be done.  The DWP is required by law to carry out these reviews, but they do seem pretty pointless if their answer to difficulties with these tests is to use the much more complex ‘test scheme’ approach that these alternative requirements were intended to avoid.

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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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