The Time for Action report, published today (27 February), said pension schemes should be subject to mandatory climate transition plans, regulated by The Pensions Regulator (TPR).
The report, which was written and researched by FIC directors Mick McAteer and Robin Jarvis, argued that defined benefit (DB) and defined contribution (DC) schemes should be required to implement climate de-risking transition plans.
Plans should be “credible and demanding” with clear targets and timeframes, and DC schemes should allow scheme members to approve potential plans.
The report also called for the Financial Conduct Authority (FCA) to extend its fund labelling regime to pension funds, adding it should work with TPR on these measures.
The report, which also aimed recommendations at the wider financial services sector, warned against deregulation, saying this could “undermine the security of people’s pensions”.
It said that following the autumn gilts crisis, the Prudential Regulation Authority (PRA) should have the responsibility regulating DB schemes.
It called for a ‘one-for-one’ rule to be applied to scheme investments, where for every pound of resource financed to a company involved in climate-damaging activities, a scheme should hold one pound of their own funds as a liability for potential losses, which can be applied to existing holdings.
It also recommended that large and listed private companies should be subject to binding sustainability disclosures, supervised by the Financial Reporting Council (FRC).
It said auditors should be able to say whether statements in a company’s reports or accounts should be qualified if they are not confident the statements were accurate and independently verified.
The FRC should work with the auditing, accounting and actuarial professional bodies on new standards and skillsets on identifying, quantifying and reporting on environment-related risks, the report added.
Additionally, a Climate Harms Register should be created for large companies and organisations. Trustees, schemes, and members could also benefit from a similar register for financial services firms, with ratings agencies and providers subject to FCA regulations.
McAteer said: “The pension sector is of huge significance when it comes to driving the transition, but we believe that TPR and related regulators do not yet have the powers required to help the achieve the UK’s legally binding net-zero goals.
“The current limited disclosure regime is simply not adequate. We need to see adjustments in capital requirements for DB schemes, and proper approved transition plans for both DB and DC schemes.
McAteer, a former non-executive director at the FCA, continued: “An important detail is that we believe events in the gilt market and DB pension sector mean prudential regulation for a systemically critical sector should move to the Bank of England/PRA. Current plans are simply not adequate despite the fact that net zero is embedded in UK legislation.”
Jarvis, professor of accounting and finance at Brunel University, said: “We need a significant shift in terms of the disclosure requirements for companies as this data underpins decisions made by pension schemes, trustees and their advisers as well as for the broader financial sector.
“Supplying independently verified data to both DB and DC pension funds in company report and accounts rather than in the form of narratives will allow regulators to require much more from the pension sector and allow it to play a full role in the climate transition which, in turn, will allow the UK to meet the Paris targets.”
