Consultation outcome

Chapter 2: Scope and timing

Updated 7 July 2021

This was published under the 2019 to 2022 Johnson Conservative government

1. This chapter sets out the government’s proposals for the scope and timing of requirements relating to pension scheme climate governance, and in relation to disclosures aligned with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).

2. This chapter:

• explains how we believe we have settled on a proportionate approach to the scope, which takes account both of trustees’ duty to appropriately manage climate risk as a financially material risk and the costs of TCFD-aligned reporting and underlying activities
• sets out our thinking behind a phased approach to our proposed governance and reporting requirements
• proposes next steps on how we would review the proposed measures in 2024 before determining how and when to extend rollout to smaller pension schemes

Costs, benefits and capacity in TCFD reporting

3. We believe that TCFD-aligned disclosures are a key mechanism by which to ensure that pension scheme trustees take account of climate risk - both by embedding it into their governance and risk management frameworks and their future strategies, and by communicating it effectively to beneficiaries and publishing it.

4. However certain parts of the TCFD governance and disclosure framework – particularly scenario analysis – will come with additional costs, and it is important to view these in the context of trustees’ other duties.

5. In chapter 5, we are seeking views from respondents on our initial estimates of the costs of TCFD-aligned reporting, which are set out in the accompanying impact assessment. We expect this cost to vary with both the extent to which the pension scheme trustees are already considering climate risk and the complexity and diversification of their portfolio, which will tend to be higher in larger schemes. However, following informal engagement with a range of stakeholders, we estimate that the typical cost of putting in place additional governance requirements, to make TCFD-aligned disclosures, is around £15,000 per year.

6. The trustees of a scheme with £1 billion of assets might have a typical spend of £5 million to £10 million per year. Approximately 90% of this might be committed to core services associated with administration or investment – meaning that the £15,000 cost of the proposed climate governance measures and associated disclosures might constitute 1.5% to 3% of their annual governance spend. We believe that this is a reasonable proportion for the oversight of a very significant investment risk and opportunity. For this exercise to be cost-neutral to pension schemes, the annual long-range return on investment – whether through enhanced return, loss avoided, or a downward management of risk, would need to amount to no more than 0.0015% of the assets under management, or 0.15 basis points (bps).

7. Were a scheme with £100 million in assets to carry out the exercise at similar cost, the break-even point would be of the order of 1.5bps, which is far from an extreme threshold. However, the upfront costs of governance and disclosure – prior to any return on the investment – might have the potential to be 15% to 30% of their annual governance spend, a very significant amount.

8. We therefore anticipate that schemes with significantly more than £1 billion of net assets will find the process of building capacity and implementing climate governance and TCFD-aligned reporting easier.

9. This is supported by evidence collated from October 2019 in response to letters sent by the Minister for Pensions and Financial Inclusion to the 40 largest defined benefit schemes (each with more than £5 billion in assets) and the 10 largest defined contribution schemes (each with £1 billion or more in assets). Responses showed that 42% of respondents had already reported in line with the TCFD recommendations or planned to in the next year.

10. Similarly, evidence from reporting by UK asset owners to the Principles for Responsible Investment earlier this year showed that more than 50 of its signatories – many of them large pension schemes – were reporting on TCFD-based indicators.

Our proposals on scope

Schemes with £1 billion or more in net assets

11. We therefore propose that our measures for climate governance and reporting should apply to trustees of occupational pension schemes for whom the value of the net assets of the scheme is £1 billion or more. We propose a 2-stage approach with a transitional threshold of £5 billion in net assets in the first year.

12. Ministry of Housing, Communities and Local Government (MHCLG) will make provision for the Local Government Pension Scheme (LGPS), in line with their responsibility for the investment and governance of the LGPS more broadly. The FCA has noted that it is considering how best to enhance climate-related disclosures by firms within the scope of its regulatory responsibilities – including those offering workplace pension schemes – coordinating as appropriate with Department for Work and Pensions (DWP) and other regulators and government departments.

13. As explained above, trustees of schemes with £1 billion or more in net assets can be expected to have the resources in place to allow them to implement and report on the range of governance and assessment measures set out in the TCFD recommendations to a high standard, with a high probability of overall benefit to the members of defined contribution schemes and the members and employer sponsors of defined benefit schemes.

14. We propose that defined benefit and defined contribution schemes should both be in scope of the measures. Whilst defined benefit schemes may have de-risked to a greater or lesser extent, even the assets of de-risked schemes – whether sovereign bonds, corporate bonds, infrastructure, property, or other matching assets – carry climate risk, through the risk of climate-induced default or downgrades. There are climate-related opportunities too, for example in the low carbon sector which has the opportunity to be upgraded as the economy decarbonises.

15. Liabilities too remain subject to significant climate change risk, through the impact of both saver longevity and yields. Even in the “end-game” of Defined Benefit (DB), the price at which pension schemes achieve buy-out or entry into a consolidator vehicle, and the risk of a buy-out provider or consolidators being able to meet its own liabilities, are also affected by climate change. Potentially most significantly, the resilience of the scheme’s sponsor may be highly sensitive to different temperature scenarios, and action by governments and others to limit temperature rises.

16. By “net assets of the scheme” we mean those attributed to the scheme in the annual report and accounts, less any “external liabilities” – that is, any liabilities other than the liabilities to pay pensions and benefits.

17. In the case of hybrid schemes – whether dual section or mixed benefit – we propose that the total assets of the scheme are used for the purpose of assessing whether the threshold has been met, and that the requirements apply to the whole scheme. This creates a level-playing field, whether benefits are money purchase, non-money purchase, or a mixture of the 2.

18. Until a permanent authorisation framework is set up in law, we propose that DB superfunds would be treated in the same way as any other occupational pension scheme. As we anticipate that most, if not all superfunds will over the long term manage net assets of well over £1 billion, we expect the vast majority of superfunds to be in scope of the climate governance and disclosure requirements, once they have reached the necessary scale.

Master trusts

19. In addition, we propose that trustees of authorised master trusts^{[footnote 45]} are also required to disclose in line with the TCFD recommendations and to comply with the underlying governance requirements proposed in this consultation, irrespective of the value of the assets of the scheme.

20. To be authorised by The Pensions Regulator (TPR), master trusts are expected to have met minimum standards in relation to a range of activities. In particular, TPR must take into account the systems and processes for risk management, investments and member communication^{[footnote 46]}, when deciding whether the scheme’s systems and processes are adequate. In determining financial sustainability, TPR must take into account factors including the scheme’s objectives, strategy and business plan, as well as the scheme’s investment strategy^{[footnote 47]}.

21. In developing the master trust authorisation framework, government has emphasised the importance of increasing trust in the market and well-run schemes not being undercut by badly run competitors^{[footnote 48]}. There is a strong argument for ensuring a level playing field across all master trusts, and ensuring that schemes whose trustees are implementing enhanced climate governance and reporting on TCFD are not undercut by, say, smaller exempt schemes taking an approach which does not take full account of climate considerations and exposes members to unnecessary risk.

22. In any case, the assets under management in authorised master trusts are growing quickly. Of the 37 master trusts which are authorised and continuing, the number with assets of more than £1 billion has increased from 11 in 2017 to 17 during 2019^{[footnote 49]}, and despite market setbacks this year, we expect that number to increase both through ongoing contributions and through consolidation.

23. Whilst there are a few much smaller authorised master trusts, all have been through a robust authorisation process. Any relaxation of the requirements below a given asset threshold would appear to be arbitrary, for the reasons given above. However, we would welcome respondents’ views on this point.

24. We propose that master trust schemes which have been established but not yet been granted authorisation should not be in scope. Otherwise the trustees of such schemes would be required to carry out a TCFD-aligned disclosure despite having no members and no assets.

25. We also propose that any unauthorised master trusts which are currently exiting the market are not in scope of these measures. Fulfilment of the requirements should not impede an urgent exit from the market and the transfer of beneficiaries’ benefits to schemes which do have climate governance measures in place.

Authorised Collective Defined Contribution (DC) schemes

26. We propose that the application of the climate governance and disclosure requirements referred to above in relation to master trusts should also apply to authorised schemes providing collective money purchase benefits.

27. Whilst it is less likely, at least initially, that Collective DC schemes will be in competition with one another, we note that the authorisation criteria set out in clauses 11-17 of the Pension Schemes Bill are similar to those in the Pension Schemes Act 2017 which govern the authorisation of master trusts. This includes consideration of the scheme’s systems and its financial sustainability. There is a strong expectation from government and Regulators that schemes offering collective money purchase benefits will be run in a way that meets a high minimum standard of governance if they are to be authorised.

Coverage of the pensions market

28. Based on the current market structure, by the end of 2023, these proposals would have the market coverage shown below. In practice scheme numbers might decrease through participants exiting the market or through withdrawals and asset price falls – or increase through contributions and asset price increases.

Figure 5: Schemes disclosing in line with TCFD^{[footnote 50]}

Total	Defined contribution	Defined benefit
367	180	328

Figure 6: Memberships of schemes disclosing in line with TCFD recommendations

Similarly, 24,697,000 memberships are currently in schemes which, on current figures, by the end of 2023 would be subject to the proposed climate governance measures and reporting in line with the TCFD recommendations^{[footnote 51]}. We expect the overall proportion to increase, due to the rapid growth of membership in the largest DC schemes.

Scheme	In scope	Out of scope
Overall	81%	19%
Defined Contribution	91%	9%
Defined Benefit	61%	19%

Figure 7: Assets of schemes disclosing in line with TCFD recommendations

Our proposals on scope would mean that by the end of 2023 – based on current market data – £1.33 trillion currently invested in occupational pension scheme assets would be accounted for by schemes complying with our proposed governance and disclosure requirements. We would expect the proportion of assets in DC schemes captured by the proposed requirements to increase rapidly due to ongoing concentration in the market, with less change in DB.

Scheme	In scope	Out of scope
Overall	74%	26%
Defined Contribution	69%	31%
Defined Benefit	74%	26%

Consultation Question

Q1. We propose that the following schemes should be in scope of the mandatory climate governance and TCFD reporting requirements set out in this consultation:

(a) trust schemes with £1 billion or more in net assets
(b) authorised master trusts
(c) authorised schemes offering collective money purchase benefits

Do you agree with our policy proposals?

Our proposals on timing

29. We propose a phased rollout of TCFD-aligned governance and reporting duties to non-master trust schemes, with trustees of schemes with £5 billion or more in net assets required to report in line with the TCFD recommendations first. Trustees of such schemes would be required to publish a TCFD report within 7 months of their first scheme year to end after 1 October 2021 or by 31 December 2022 – whichever is earlier. This would mean that trustees of all schemes should have published a TCFD report by the end of 2022.

30. We propose that schemes would refer to their TCFD report in their annual report and accounts for the corresponding scheme year – this is explained in more detail in Chapter 4. They would also be required to comply with the proposed underlying governance activities for the scheme year, or remainder of the scheme year to which their TCFD report relates, in accordance with the proposals set out in Chapter 3.

31. As explained above, we believe that larger schemes will have greater governance capacity, resources and capability to establish, carry out and document the necessary governance processes and disclosures to a faster timescale.

32. Government’s proposal is that trustees of schemes with £1 billion or more in net assets, but less than £5 billion, should have an additional year in which to prepare for these measures. Accordingly, trustees would be required to publish a TCFD report within 7 months of their first scheme year to end after 1 October 2022, or by 31 December 2023 – whichever is earlier. This would mean that all such schemes should have published a TCFD report by the end of 2023.

33. We would however encourage trustees of such schemes to make efforts to begin work during the preceding reporting year, to test their approach in preparation for the governance and reporting requirements becoming legally binding.

34. In addition to allowing trustees of schemes in the asset range of £1 billion to £5 billion in net assets more time to prepare, we anticipate that the experience of scheme trustees in the first round of reporting would set a benchmark of emerging good practice in the sector for scheme trustees reporting in the second round to learn from and aspire to.

35. It would also enable advisers and service providers more time to develop product offerings, commoditised where appropriate, for trustees of the second round of schemes to access at a proportionate cost.

36. However, we do not propose a similar phased approach in relation to authorised master trusts or any authorised scheme offering collective money purchase benefits. Here the requirement for a similar minimum standard of governance, and the need to ensure a level playing field between master trusts is the prime consideration.

37. We therefore propose that trustees of such schemes should be required to disclose in line with the recommendations of the TCFD within 7 months of their first scheme year to end after 1 October 2021, or by 31 December 2022 if earlier, meaning that all such schemes should have published a TCFD report by the end of 2022.

Timing of the asset threshold test and the coming into force date

38. All occupational pensions operate under a scheme year, defined similarly for the purposes of a range of regulations^{[footnote 52]}. We are mindful that occupational pension schemes operate on a very wide range of scheme years. Whilst 1 January to 31 December and 1 April to 31 March are common cycles, many others are in use.

39. The audited accounts of occupational pension schemes are required to show a true and fair value of both the amount of the assets at the end of the scheme year, and any liabilities (other than the liabilities to pay pensions and benefits after the end of the scheme year^{[footnote 53]}).

40. Financial Reporting Standard 102 (FRS102)^{[footnote 54]} also requires a statement of net assets. In addition, for defined benefit schemes, the actuarial valuation or actuarial report required under section 224 of the Pensions Act 2004 requires the scheme assets to be valued.

41. Certain assets of the scheme, such as illiquid assets which are not traded on public markets, will be more difficult to value and an additional in-year valuation will add unnecessary cost. We therefore propose to use the value of the assets at the end of the first scheme year to end on or after 1 June 2020 to determine whether schemes will be subject to the proposed reporting requirements by the end of 2022.

42. Our proposal is that trustees of schemes whose net assets are £5 billion or above on that scheme year end date would need to comply with most climate governance requirements which underpin the TCFD recommendations as soon as the regulations are proposed to come into force, on 1 October 2021. This would be the case even if that was part way through a scheme year. A number of the requirements – those relating to scenario analysis, the collection of data and calculation of metrics and the performance against targets should be carried out at discrete intervals through the scheme year, including part-years. This is covered in Chapter 3.

43. Within 7 months of the end of the scheme year which was underway on 1 October 2021 – or by 31 December 2022 if earlier – trustees would need to produce and publish a TCFD report which explains how they complied with the governance requirements between 1 October 2021 and the end of the scheme year. This would meet government’s intention to build on the Green Finance Strategy and put the expectation of TCFD-aligned reporting by the largest asset owners by the end of 2022 on a statutory footing.

44. A second wave of schemes would follow, from an assessment of the net assets of the scheme on the next scheme year end date on or after 1 June 2021. The requirements set out above would then follow the same approach but be moved on by one year.

45. Our intention in proposing this timescale is to ensure that scheme trustees – especially smaller schemes who are less likely to be doing TCFD-aligned reporting already – have notice that they will be in scope of the requirements and can make preparations accordingly.

46. We have considered whether schemes with between £1 billion and £5 billion in net assets should be required to meet the proposed governance and disclosure requirements on the same timescale as those with £5 billion or more. Whilst earlier moves to carry out TCFD-aligned reporting will likely have some benefit for DC beneficiaries and sponsoring employers of DB schemes, evidence suggests that more schemes in this size range may be less well-advanced in gearing up to implement the necessary governance requirements and to make TCFD-aligned disclosures. Earlier disclosures – whilst achievable – might well be weaker or more limited. We therefore propose to give schemes in the £1 billion to £5 billion range more time to prepare for high quality disclosures by the end of 2023. We would welcome respondent views on this.

47. Some trustees will already know when considering our consultation proposals whether their scheme would be in scope of the first wave because their scheme year will have ended between June and August 2020. Under our proposals all trustees would know for certain whether they are in scope of the first wave soon after the end of May 2021, by which time all possible scheme year cycles ending after the 1 June 2020 will have ended.

48. Our proposals also seek to strike a balance, by giving schemes which have less time to prepare for the climate governance requirements more time to prepare their TCFD report, and vice versa.

49. The proposed governance requirements would apply to authorised master trusts and any authorised schemes offering collective money purchase benefits from 1 October 2021. Trustees of such schemes would be required to publish their TCFD report within 7 months of the end of the scheme year which was underway 1 October 2021, or by 31 December 2022 if earlier, irrespective of their assets under management.

50. We propose that trustees of master trusts and schemes offering collective money purchase benefits that become authorised later than 1 October 2021 would be required to comply with the climate governance requirements from the date they become authorised, and produce a TCFD report annually thereafter. Trustees of schemes which have not yet been granted authorisation or which have not yet been established would have forewarning of the need to comply with the climate governance and disclosure requirements from the date of authorisation, and time to prepare whilst TPR is considering their application.

51. These proposals are summarised below.

Table 1: Timing of requirements during introduction

The condition	Governance requirement	Disclosure Requirements	Disclosure Requirements
If	Trustees must meet the climate governance requirements for	Trustees must publish a TCFD report	Trustees must include a link to the TCFD report from
On 1st scheme year to end on or after 1 June 2020, the scheme has assets ≥ £5 billion Or On 1 October 2021, the scheme is an authorised master trust Or On 1 October 2021 the scheme is an authorised scheme providing collective money purchase benefits	Current scheme year from 1 October 2021 to end of that scheme year. And [unless scheme is no longer authorised, and assets are < £500 million] Next full scheme year to begin after 1 October 2021 to end of that scheme year.	Within 7 months of the end of the scheme year which is underway on 1 October 2021, or by 31 December 2022 if earlier. And Within 7 months of the end of the next scheme year to begin after 1 October 2021, or by 31 December 2023 if earlier.	The Annual Report and Accounts produced for that scheme year
On 1st scheme year to end on or after 1 June 2021, The scheme has net assets ≥ £1 billion	Current scheme year from 1 October 2022 to end of that scheme year	Within 7 months of end of that scheme year, or by 31 December 2023 if earlier.	The Annual Report and Accounts produced for that scheme year

Example 1

The Maed-Upp DC pension scheme has a scheme year running from 1 January to 31 December. On 31 December 2020 [the first scheme year end date on or after 1 June 2020] the value of the net assets of the scheme was £500 million. As this is below £5 billion, the scheme is not caught in the first wave of schemes to be subject to the governance and disclosure requirements.

The sponsoring employer of Maed-Upp is considering a merger with U N Reel, which has its own DC scheme with £600 million in net assets. If the merger goes ahead and the members of the U N Reel scheme are transferred into Maed-Upp scheme, before 31 December 2021, the £1 billion threshold is met, and the climate governance requirements would apply from 1 October 2022, with the trustees of Maed-Upp being required to produce a TCFD report by 31 July 2023, 7 months after the scheme year end date.

If, however, the transfer takes place after 31 December 2021, the Maed-Upp trustees would not be subject to the climate governance requirements or required to produce a TCFD report in 2023. The requirements would start to apply only from one year after the scheme year end date at which their net assets equal or exceed £1 billion. This is covered in the next section.

In the unlikely event that the schemes consolidate without the company merger going ahead, Maed-Upp would become a master trust and its trustees would need to seek authorisation. The governance requirements would apply from the date of authorisation and the trustees would be required to produce and publish a TCFD report for the scheme year which was underway at that point, within 7 months of the scheme year end date.

The ongoing scope of the requirements

Schemes exceeding the asset threshold over the time

52. Clearly over time many schemes will grow in assets under management, whilst others will shrink, and new master trusts may become authorised in 2022 and beyond. We propose that from 1 June 2022 onwards, trustees of schemes whose net assets equal or exceed £1 billion on the next scheme year end date should be required to implement the governance requirements, starting from one year after that scheme year end date. We also propose that trustees would be required to publish their TCFD report within 7 months of the end of the scheme year to which the governance requirements apply. They would also be required to include a link to their TCFD report in their annual report and accounts produced for that scheme year, not the current scheme year.

53. This allows time for scheme trustees to prepare to set appropriate governance measures in place. We consider that the alternative, of applying the governance requirements from the scheme year beginning immediately after the end date at which the assets met the £1 billion threshold, would cause the perverse consequence whereby the trustees find part way through the scheme year – once the scheme’s assets have been valued for the previous scheme year – that their net assets unexpectedly exceeded £1 billion, and that they should have already been complying with the climate governance requirements. Trustees of such schemes might be in immediate breach of the legislation, with no opportunity to make amends.

Schemes falling below the threshold

54. There likely will be some circumstances in which it will be disproportionate to expect trustees of a once-large scheme to continue to produce a TCFD report when its assets become very much reduced. For example, the trustees of a DC scheme may bulk transfer all members except those who, due to the nature of the underlying guarantees at fund level, are unable to find a destination scheme. Or the trustees of a DB scheme may carry out a series of bulk annuity transactions which result in their net assets for the purposes of the annual report and accounts being gradually reduced to a very small proportion of their original amount.

55. In relation to the circumstances in which schemes fall below the threshold, we have considered two broad options, covered in turn below.

56. We might prescribe that if a scheme dips below £1 billion in net assets at the scheme year end date, then the requirements fall away, but only from one year after that scheme year end date.

57. This would be a symmetrical approach, as schemes would essentially come in and out of scope of the climate governance requirements and the TCFD recommendations based on net assets on a one-year delay. Whilst this symmetry has its attractions, we foresee some difficulties.

58. First, a small number of mature schemes will likely hover around £1 billion for significant periods and drift in and out of scope with underlying movements in asset prices. For example, TPR have identified 23 schemes with net assets of between £0.95 billion and £1.05 billion^{[footnote 55]} who will be particularly subject to these effects. There might even be more perverse impacts, because of the proposed one-year delay between the net assets meeting the threshold and the climate governance requirements beginning to apply. Schemes might switch between mandatory climate governance and reporting requirements on years when they had less than £1 billion in net assets, and no statutory requirements when they had more than £1 billion.

59. Second, more significantly, this approach suggests that these requirements are ‘all stick’. We believe that application and disapplication of a duty as a scheme crosses and re-crosses a notional threshold would distract from the benefits to the beneficiaries, relative to the costs, of reporting in line with the TCFD recommendations. Once scheme trustees have applied measures to ensure governance, strategy, risk management and the setting and reporting of metrics and targets it would be good practice to continue to apply them.

60. It may also create the perverse outcome that where a scheme’s net assets have dropped very significantly, say from £1 billion to £50 million, as a result of one of the events outlined in paragraph 54, the duties would not fall away with immediate effect. The trustees would be required to continue with the climate governance requirements in the subsequent year and be reporting on how they have acted on these requirements within 7 months of the start of the following scheme year, a whole 19 months on from the point when the scheme’s net assets dropped to one-twentieth of the threshold.

61. An alternative, which seeks to take account of the issues above, is for schemes which come into scope to remain in scope unless their net assets drop below £500 million at any subsequent scheme year end. This reflects the fact that once the climate governance duties are in place it should become less difficult for trustees to continue to follow them and report on them. It allows engaged members to follow scheme reporting, including the results of scenario analysis, metrics and targets, over time, and avoids the perverse outcome of out of sync reporting described above.

62. Government’s proposal to review these measures in 2024 would provide an opportunity to examine the emerging effects of this proposal and any unintended consequences.

63. We therefore propose that where a scheme’s net assets do drop below the £500 million threshold at any particular scheme year end, the ongoing climate governance requirements fall away with immediate effect, but scheme trustees would still be required to produce a final TCFD report within 7 months of the scheme year which had just ended and in respect of which the underlying governance requirements will have applied.

64. The scheme would not come back into scope again unless its net assets met or exceeded £1 billion on a scheme year end date.

65. The proposed policy is summarised below.

Table 2: Ongoing timing of requirements for schemes coming into scope

The condition	Governance requirement	Disclosure requirements	Disclosure requirements
If	Trustees must meet the climate governance requirements for	Trustees must publish a TCFD report	Trustees must include a link to the TCFD report from
On 1st scheme year to end on or after 1 June 2021 + n (where n is any whole number ≥ 1 the scheme has assets ≥ £1 billion	Next full scheme year to begin on or after 1 October 2022 + n	Within 7 months of the end of that scheme year.	The annual report and accounts produced for that scheme year

Table 3: Ongoing timing of requirements for schemes falling out of scope

The condition	Governance requirement	Disclosure requirements	Disclosure requirements
If	Trustees’ climate governance requirements	Trustees publish a TCFD report	Trustees must include a link to the TCFD report from
On 1st scheme year to end on or after 1 June 2021 + n (where n is any whole number ≥ 1 the scheme has assets < £500 million	End with immediate effect [unless scheme is an authorised scheme].	Within 7 months of the end of that scheme year.	The annual report and accounts produced for that scheme year

Where n is a whole number of one or more.

Example 2

N Vented Partnership has a scheme year of 1 July to 30 June. Its net assets are below £1 billion on 30 June 2020 – the first scheme year end date to fall after 1 June 2020. This means it is not in the first wave, and the trustees are not required to comply with the climate governance requirements or to publish a TCFD report by the end of 2022.

Similarly, the net value of the scheme’s assets on 30 June 2021 remains below £1 billion, and it is therefore excluded from the second wave – trustees are not required to comply with the climate governance requirements or to publish a TCFD report by the end of 2023.

However, by 30 June 2022, N Vented has £1.01 billion in net assets. The climate governance requirements do not apply with immediate effect, but from the beginning of the next scheme year – 1 July 2023 to 30 June 2024. Trustees must also publish a TCFD report for that scheme year by the annual report and accounts deadline of 30 January 2025.

By 30 June 2023, N Vented Partnership’s assets have dipped to £0.99 billion. But this does not remove the requirement for trustees to publish the January 2025 TCFD report and the governance requirements would remain in place for N Vented unless net assets dropped below £500 million at a future scheme year end.

Master trusts and Collective Defined Contribution (CDC) schemes

66. As highlighted above in paragraph 50, in relation to authorised master trusts and authorised schemes offering collective money purchase benefits, we propose a different approach to ongoing governance and disclosure requirements.

67. For these schemes we propose that the climate governance requirements should apply to trustees immediately upon authorisation and they should be required to produce a TCFD report within 7 months of the end of the scheme year in which their authorisation is granted. Again, we believe that this is a proportionate approach because of the governance expectations on authorised schemes and because trustees will have forewarning of the need to authorise and time to prepare whilst TPR is considering their application.

68. We propose that where schemes experience a triggering event^{[footnote 56]}, the duties should continue to apply. Where a scheme no longer needs to be authorised, for example, because it reverts to being a single employer scheme or ceases to offer collective money purchase benefits and had less than £500 million in net assets at the previous scheme year end date, we propose that the climate governance duties and the duty to produce and publish a TCFD report fall away with immediate effect.

69. Because we do not propose a phased approach to the introduction of requirements on authorised schemes, the ongoing requirements would apply from 1 October 2021.

Table 4: Ongoing timing of requirements for authorised schemes coming into scope

The condition	Governance requirement	Disclosure requirements	Disclosure requirements
If	Trustees must meet the climate governance requirements	Trustees must publish a TCFD report	Trustees must include a link to the TCFD report from
After 1 October 2021 the scheme Is an authorised master trust or Is an authorised scheme providing collective money purchase benefits	With immediate effect	Within 7 months of the end of the scheme year in which they become authorised	The annual report and accounts produced for that scheme year

Table 5: Ongoing timing of requirements for authorised schemes falling out of scope

The condition	Governance requirement	Disclosure requirements
If	Trustees’ climate governance requirements	Trustees’ TCFD report publishing duties
After 1 October 2021 the scheme Ceases to be required to be an authorised master trust Or Ceases to be required to be an authorised collective DC scheme	End with immediate effect unless scheme meets the asset threshold [has ≥ £500 million at end of previous scheme year].	Fall away with immediate effect unless scheme meets the asset threshold [has ≥ £500m at end of previous scheme year].

Consultation Question

Q2: We propose that:

(a) trustees of schemes with £5 billion or more in net assets on their first scheme year end date to fall on or after 1 June 2020 are subject to the climate governance requirements from 1 October 2021 and the trustees must publish a TCFD report within 7 months of the current scheme year end date or by 31 December 2022 if earlier
(b) trustees of schemes with £1 billion or more in net assets on the first scheme year end date to fall on or after 1 June 2021 are subject to the climate governance requirements from 1 October 2022, and the trustees must publish a TCFD report within 7 months of the current scheme year end date, or by 31 December 2023 if earlier
(c) trustees of master trust or collective money purchase schemes which are authorised on 1 October 2021 are subject to the climate governance requirements with immediate effect, and the trustees must publish a TCFD report in line within 7 months of the current scheme year end date, or by 31 December 2022 if earlier

After 1 October 2021

(d) trustees of master trust or collective money purchase schemes which become authorised are subject to the climate governance requirements with immediate effect, and the trustees must publish a TCFD report within 7 months of the current scheme year end date
(e) where schemes cease to require authorisation, the climate governance and TCFD-aligned reporting requirements fall away with immediate effect, unless they remain in scope via the asset threshold on the previous scheme year end date

From 1 June 2022 onward

(f) trustees of schemes not already in scope of the requirements and with £1 billion or more in net assets on any subsequent scheme year end date:

• are subject to the climate governance requirements starting from one year after the scheme year end date on which the £1 billion asset threshold was met
• must publish a TCFD report within 7 months of the end of the scheme year from which the climate governance requirements apply

(g) trustees of schemes in scope of the requirements whose net assets fall below £500m on any subsequent scheme year end date cease to be subject to the climate governance requirements with immediate effect (unless they are an authorised scheme) but must still publish their TCFD report for the scheme year which has just ended within 7 months of the scheme year end date

Do you agree with these policy proposals?

Review of measures and extension to smaller schemes

70. We recognise that, as part of their fiduciary duties, trustees should already be considering the impact of climate change risk to their beneficiaries, irrespective of scheme size and resources. In addition, active savers will typically find that employer pension contributions are conditional on using the employer’s chosen scheme. Deferred members of defined benefit schemes will typically be unable to move pension rights without sacrificing valuable guarantees, whilst defined contribution savers may end up with a number of pension pots in schemes, some of which will be covered by our proposals here, and others which are not.

71. This suggests that ultimately there is a strong policy case, based on fairness to pension savers, for extending adoption of the TCFD framework and reporting requirements to trustees of smaller pension schemes.

72. However, the desirability of reaching full coverage must be weighed against other complicating factors. These include:

• the relative cost of implementing the TCFD recommendations for smaller schemes is significantly higher, as set out in paragraphs 6 to 8 above
• there is a risk that the lack of significant in-house governance resources for smaller schemes, making them largely or wholly dependent on external advice and analysis, means that the governance activities underpinning the TCFD recommendations are less securely embedded in scheme practices
• the lack of exit strategies for less well-funded defined benefit schemes
• whilst defined contribution schemes are consolidating, with numbers falling by approximately 9% a year^{[footnote 57]}, there remains a long tail of small schemes. DWP consulted on proposals to encourage or nudge smaller occupational DC schemes to consolidate in 2019 and intends to bring forward a consultation on policy and regulations shortly, which will help to address this. However, we acknowledge the continuing challenges with finding destinations and the treatment of guarantees

73. We also anticipate that moves by up to 400 pension schemes to adopt and develop reporting in line with the TCFD recommendations will drive down costs. Product elements can be repurposed by advisers and service providers to develop offerings which are commoditised to serve all parts of the market, at a proportionate cost.

74. With these considerations in mind, and subject to the outcome of this consultation we propose that government carries out a review in 2024 of the effectiveness of TCFD aligned reporting and governance measures implemented to date.

75. We propose that the review covers:

• the quality of disclosures to date, and the impact of the requirements on trustee decision-making
• whether the expectations in relation to scenario analysis, metrics and targets should be made mandatory in relation to some or all scheme assets – for example where disclosure for issuers is becoming mandatory, rather than ‘as far as they are able’. And if so, on what timescale
• how statutory guidance should be updated
• the availability and quality of both free and paid-for tools and services, and the cost of paid-for services
• which requirements and on what timescale should be extended to smaller schemes

76. The timing of this proposed review would ensure that these measures, which relate to occupational pension schemes, are responsive to development of wider UK Government policy, agreed and set by the UK joint TCFD taskforce and its co-ordination of a fit-for-purpose climate change disclosure regime.

77. We believe a holistic discussion on both the effectiveness of the legislation to date, and the marketplace for tools and services will be the best way to inform a decision on how and when to extend the requirements to schemes with less than £1 billion in net assets.

Consultation question

Q3. Subject to government deciding to adopt any of the governance or reporting requirements proposed in this consultation, we propose to conduct a review in 2024 on whether to extend the measures to schemes with below £1 billion in net assets which are not authorised master trusts or an authorised scheme offering collective money purchase benefits, and if so how and on what timescale.

This review would be informed by consideration of TCFD disclosures by occupational pension schemes to-date, their impact, and the availability and quality of both free and paid-for tools and services.

We would propose also to review any regulations and statutory guidance which had been put in place to identify whether any of this needs to be strengthened or updated.

Do you agree with these proposals?

1. As defined in section 1 of the Pension Schemes Act 2017. Under the proposals only schemes to which part 1 of the Act applies would be in scope. This means that schemes which fall under regulation 26 or 27 of the Occupational Pension Schemes (Master Trusts) Regulations 2018 (SI 2018/1030) (“the master trust regulations”) would be excluded. ↩

2. Paragraphs 7, 10 and 11 of Schedule 4 to the master trust regulations. ↩

3. Paragraphs 1 and 4 of Schedule 2 to the master trust regulations. ↩

4. Master trust authorisation Impact Assessment Final stage – March 2018. ↩

5. TPR estimates based on annual scheme returns. ↩

6. DC and DB numbers do not add up to total because a scheme with £1 billion+ DB and £1 billion+ DC is counted twice, as are schemes with £1 billion+ DB that are also authorised master trusts. ↩

7. Based on membership and asset data from actuarial roll forward figures used in DB Landscape. [see page 14 of B Landscape – cut from the scheme register as of 31 March 2019 and from scheme returns used in DC Trust – taken from the scheme register as of 1 January 2020. ↩

8. See for instance the Occupational Pension Schemes (Scheme Administration) Regulations 1996 (SI 1996/1715), the Occupational and Personal Pension Schemes (Disclosure of Information) Regulations 2013 (SI 2013/2734), and the Occupational Pension Schemes (Requirement to Obtain Audited Accounts and a Statement from the Auditor) Regulations 1996 (SI 1996/1975). ↩

9. Regulation 3 of the Occupational Pension Schemes (Requirement to Obtain Audited Accounts and a Statement from the Auditor) Regulations 1996 (SI 1996/1975). ↩

10. FRS 102: The Financial Reporting Standard applicable in the UK and Republic of Ireland. ↩

11. TPR estimates based on annual scheme returns. ↩

12. See section 21 of the Pension Schemes Act 2017 in relation to master trusts, and clause 31 of the current Pension Schemes Bill in relation to schemes offering collective money purchase benefits. ↩

13. The Pensions Regulator. DC trust: scheme return data 2019 to 2020 – table 1.2. ↩