Should DC defaults reflect government climate targets?
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The government should consult on whether defined contribution default options should align with government climate targets, MPs have recommended, saying also that the Pensions Regulator should issue guidance for schemes looking to set net zero targets. The Work and Pensions Committee has also rebutted pensions minister Guy Opperman’s request for a recommendation to move the Local Government Pension Scheme to his department.
The Work and Pensions Committee has published a report, ‘Pension stewardship and COP26’, related to its inquiry into the subject over the summer. The UK will be hosting the UN’s 26th climate conference in Glasgow from 1-12 November this year. It is among the first to introduce mandatory climate reporting for pension funds, with rules coming into force on Friday.
Default options should align with climate policy
MPs say that the government should consult on making climate considerations part of every DC default arrangement – to date, this is optional despite the UK having set itself a target of achieving net zero by 2050.
“Defined contribution schemes used for automatic enrolment are required to have a default option into which the member is enrolled, unless they specify an alternative. We recommend that the Government consult on whether there is a case for mandating that these default options should align to UK Government climate goals,” the report states.
Mandating how schemes should invest is a legal question which was recently tested in the Supreme Court, which ruled that government cannot dictate investments. The case concerned the question of whether local authorities and their schemes, being public sector entities, can be compelled to invest in line with UK foreign policy.
Mandating particular investment styles for private sector funds could cause even greater upset in the industry – this was already demonstrated when the wording of draft TCFD legislation seemed to suggest that schemes must adjust their investments.
TPR should produce net zero guidance
Schemes that have not integrated climate considerations into their investments may have done so because of perceived legal uncertainty, it says, proposing that it is for TPR to clarify the matter.
“Some trustees are concerned that acting on environmental, social and governance issues and climate change matters may be contrary to their fiduciary duty. While we do not believe the fiduciary duty should be changed, to address this uncertainty we recommend that the Pensions Regulator establish a working group to develop guidance for schemes looking to set net zero targets,” MPs say.
Harmonisation of standards and a ‘UK climate roadmap’
Climate change is a global phenomenon, and so the measures to fight it must be global as well. The committee argues that the UK should encourage other countries to follow its lead in mandating the use of the Taskforce on Climate-related Financial Disclosures framework, saying that “global harmonisation of climate-related reporting standards would considerably reduce the burden and the associated costs to pension schemes of meeting different reporting requirements”.
It also wants to see alignment between green taxonomies, which set out the criteria for activities and products to be viewed as ‘green’. The green taxonomy “will be vital to the success of measures introduced by the Government to tackle climate change”, MPs believe. They add that “as far as possible the taxonomy should align with international standards, such as the EU’s green taxonomy published in 2020, whilst also fully reflecting the UK context”. The UK chose to start building its own taxonomy after Brexit, partly because the EU had come under fire for having caved in to industry interests on the taxonomy.
To further increase certainty for investors, particularly in long-term investments such as infrastructure, the government should create a “climate roadmap”, including sector specific pathways to meet the Paris Agreement goals, MPs say.
Will the charge cap have to go?
As for the charge cap on default pension saving products used for auto-enrolment that is under review, the committee believes it is important for ensuring good value for savers - but not set in stone. “We support the Government’s decision to review whether there are other charging structures which could better enable long-term and resource intensive investments, such as in infrastructure, while continuing to protect savers’ interests,” MPs say.
The government is attempting to soften the charge cap to enable more investment in long-term assets such as private equity and infrastructure, which tend to come with higher fees, arguing that the focus should shift from cost to value. However, some in the industry have said it is for asset managers to adjust their fees if they want to sell their products - not for savers to pay more. Others have pointed to the inherent high risks such products carry.
LGPS as a leader – but not under DWP
While TCFD reporting is now starting for private sector schemes, the LGPS is still to consult on the matter. Despite this time lag, the committee argues that its size means the LGPS “could be well placed to demonstrate and develop best practice in pension scheme governance, including on climate change”.
However, the LGPS should not be moved to the Department for Work and Pensions, where pensions minister Guy Opperman has been a driving force behind climate change legislation for schemes; he had asked the committee for a recommendation on this, believing that schemes should be under one roof. Currently, the LGPS is in the jurisdiction of the Ministry for Housing, Communities and Local Government.
MPs however are not in favour of such a change, calling it “an interesting view”.
They say: “The Minister for Pensions and Financial Inclusion told us that he believes that the LGPS should be run by the Department for Work and Pensions. This is an interesting view. We are not convinced that DWP setting pension policy for the whole sector while running one of the largest pension schemes would be straightforward or desirable given the inherent conflicts of interest.”
What do you think about the committee’s recommendations?