It’s time for all pension schemes to consider their climate risks 

The Pension Regulator’s (TPR) forthcoming General Code is expected to include a module on climate risk that makes explicit the need for schemes to consider their exposure to rising global temperatures. TPR expects schemes with 100 members or more to:

TPR says other schemes may choose to consider these expectations as best practice. This means all schemes are effectively required to assess and report on risk related to increasing global temperatures.

Large schemes are already required to consider their exposure to climate risk in detail, in order to comply with standards set out by the Taskforce on Climate-related Financial Disclosures (TCFD). UK schemes with assets under management of £1 billion or more have been required to comply with TCFD since October 2022.

Many smaller schemes will only just be getting started on climate risk, and for trustees the task may seem daunting. But you can make progress by taking basic early steps and building from there.

Learn more about other pension scheme risks - cyber and DEI.

For many schemes, TPR’s requirements will be the trigger to begin taking climate risk seriously. Failing to do so means breaching the code.

The inclusion of climate change in the General Code highlights existing risks that pension schemes should already be considering. These include:

• Fines for schemes with assets under management of £1 billion or more. The government is considering which additional schemes should be covered by TCFD requirements in future.
• Reputational risk for companies with ambitious climate policies if their pension schemes aren’t aligned with corporate values.
• Financial risk — if your scheme is heavily invested in, for example, potentially stranded assets or fails to invest in businesses that will gain from the climate transition, your members could lose out. Do you offer a sustainable fund in your default strategy?
• Lack of member engagement — environmental issues are increasingly important to scheme members. This provides an opportunity to raise members’ interest in their pensions — and risks member discontent if expectations aren’t met.

If you are only just beginning to consider the implications of climate change for your scheme, you are not alone. Mercer’s RITE (Responsible Investment Total Evaluation) assessment shows schemes making progress on integrating sustainable investment but more than half of schemes scoring C+ or lower on a scale of A++ to C.

Trustees often tell us they feel overwhelmed by the volume of requirements they face, and this is particularly true of smaller schemes. But it’s not difficult to put the building blocks in place. Here are five early steps you can take as trustees to comply with the new requirements:

Mercer has the knowledge, experience and understanding to help guide you through addressing climate change risk. Our pragmatic approach brings insight into best practice and applies it to your scheme’s individual circumstances. 

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