The new Pensions Scheme Act and how it impacts sustainable finance
Authors: David O’Sullivan, UK Policy Officer at ShareAction
Today the Pension Schemes Act 2021 was quietly signed into law. It enacts a package of measures affecting how pension schemes operate, including their provision of sustainable finance.
The Department for Work and Pensions introduced the Act for a number of reasons. First, it facilitates the creation of Collective Defined Contribution (CDC) pension schemes, the first of their kind in the UK. In the Netherlands, CDC schemes have been pioneered as a means of pooling risk for savers. As in regular Defined Contribution schemes, both the employer and the scheme member pay into a pension pot. The key difference is that CDC scheme members, rather than pay into individual pots, have a collective pot, shared across the entire membership. This collective pot better protects the value of the scheme’s assets from market volatility.
Secondly, the Act details how the online Pensions Dashboard will operate. This will be a one-stop shop for savers from different schemes to access information from their pension provider – for example, about their benefits and entitlements. Among the Act’s other measures are the granting of new powers to The Pensions Regulator, allowing it to sanction employers who have underfunded pension schemes.
The legislation has an overarching focus on protecting pension savers. What is particularly welcome is that the Act extends this to climate change, recognising the risk it poses to people’s retirement funds. Section 124 creates new mandatory climate reporting for occupational pension schemes. These schemes will need to publish reports on their governance, strategy, risk management, and metrics and targets in relation to climate change. These reports, modelled on the Taskforce for Climate-related Financial Disclosures recommendations, will aid schemes with assessing and managing climate risks and opportunities to their scheme. ShareAction formed part of the Pensions Climate Risk Industry Group, which has produced detailed guidance on how to align with TCFD.
The Act strikes a necessary balance of maintaining the independence of trustees on investment decisions, and giving them new duties to factor climate risk into their decision-making. Trustees are not compelled to divest from fossil fuels; they have the flexibility to chart their own path towards a more sustainable investment approach – for example, by stepping up their engagement with carbon-intensive companies, or diversifying the scheme’s portfolio to incorporate shares in green energy.
This is the real test of the Pension Schemes Act. As things stand, it is likely that when the first round of climate reports is published, they will indicate most pension schemes have a huge amount of work to do. It is therefore crucial the data in the climate reports is used effectively to make the necessary changes.
Going forward, there is scope for the Government to expand this kind of risk reporting to other ESG factors – for example, labour standards in company supply chains. It could also apply such reporting beyond the occupational pension schemes to other types of scheme, so that as much of the pensions industry is covered as possible.
The Act utilises the unique ability of Government to drive a race to the top amongst pension schemes, ensuring they are building a better world to retire into and we welcome the DWP’s leadership. We hope these changes will have a positive impact on the pension sector’s ability to mitigate climate risk. When the first round of climate reports is published, the Government should consider what exemplifies best practice, and how this can be replicated across the sector.