The Pensions Regulator has said larger defined benefit and defined contribution schemes perform better on climate governance than small ones – and is urging small DC schemes to consolidate, while also identifying consolidation as a potential barrier to climate change adaptation.

TPR’s second climate adaptation report published on Thursday forms part of the national assessment of the UK’s resilience to climate change and future adaptation priorities. TPR looks at how its regulated community fares, pointing out that private occupational pension schemes manage around £1.4tn worth of retirement savings for millions of people in the UK. 

TPR chief executive Nausicaa Delfas said there is still a long tail of schemes where the trustees' knowledge of the scale of financial risks posed by climate change is limited. 

“Where schemes cannot compete on value or governance, we have been clear that the trustees should consider consolidating and exiting the market,” Delfas said.

Consolidation might not lead to the desired improvements straight away, however. While saying larger schemes have better climate change governance, TPR’s report cites DC consolidation as a potential barrier to climate change adaptation, saying that “some DC, DB/DC hybrid schemes and master trust expect to consolidate in the short to medium term and can be reluctant to implement some changes, given the potential for further changes (and further transaction cost impacts) on consolidation”. 

The regulator plans to innovate to improve its own approach, as Delfas added: “But we must also change how we work as a regulator to encourage the delivery of enhanced outcomes for savers. TPR needs to be proactive and innovative, from the use of AI to supervising schemes differently to identify risk sooner.” 

To help trustees in managing climate risks, TPR said it will continue to:  

The regulator found that just 17% of DC schemes had dedicated time or resources to considering climate risk, but that this rose to 100% for master trusts and 92% of large schemes. There was also considerable variation between other size categories, with about half (53%) of medium schemes considering climate risk, a quarter of small schemes and just 4% of micro schemes. 

More than a quarter (28%) of respondents said they understood the scale of the financial risks posed by climate change to their DC scheme ‘very well’ or ‘fairly well’, according to TPR, but again this varied widely by scheme size. All master trusts said so as did 90% of large schemes and 63% of medium-sized schemes, but only 29% of small and 17% of micro schemes felt they understood the risks. 

“Good investment governance is critical to protecting and enhancing saver outcomes,” said TPR’s climate and sustainability business lead, Mark Hill. 

“Where trustees cannot meet our expectations on protecting savers, they should ask themselves if consolidating into a larger scheme would be in their savers’ best interests,” he said. 

The report mentions that raising trustee awareness of transition plans and their benefits is an area of focus for TPR, even though “there is likely to be some lead time before implementation”.

Labour said in its election manifesto that it would mandate banks, asset managers, pension funds, insurers and FTSE 100 companies “to develop and implement credible transition plans” that align with the Paris Agreement goal of limiting global warming to 1.5°C.
   

   
TPR cites transition plans as potential enablers of adaptation. “Unlike TCFD reporting, which is backward looking and uses historic carbon data, transition plans are forward looking, strategic plans and have the potential to drive real change and action. These plans also have the potential to integrate nature and social factors alongside climate adaptation,” it writes.
   

 

 
In the report, TPR notes that as well as mandating transition plans, the current government has set out a commitment to an economic strategy to support "investment... and borrowing, to deliver long-term growth and accelerate the transition to a climate resilient, nature positive and net zero economy".

TPR also highlights the government's Industrial Strategy 2035 green paper from last October, which outlined the government's belief that clean energy is the economic and industrial opportunity of the 21st century and that mobilising public and private finance will be critical, saying McKinsey estimates the global market opportunity for UK companies supporting the transition could be worth more than £1tn.