More than a quarter of defined benefit (DB) pension schemes in the UK are aiming for minimal compliance with climate change regulations, research by Lane Clark & Peacock (LCP) has uncovered.
When asked about their approach to climate change regulations, 29% of DB schemes polled by LCP said that minimum compliance was their aim, with only 5% aiming to be market leading.
The market survey also found that, although nearly half of schemes allow for climate change risks on the employer covenant, 40% do not, with the remainder believing it's irrelevant to them.
This is despite the Pension Schemes Act bringing in specific requirements for larger schemes to enhance their climate governance.
Overall, the majority of schemes asked expected there to be little impact on the operation of their pension scheme across all the new requirements.
“While the best prepared schemes are already on top of climate and regulatory risk, there are some that are not,” said Mary Spencer, partner at LCP. “They can’t afford to ignore the potentially turbulent waters ahead if climate-related risks aren’t put at the top of the agenda.
“Climate regulation is an accelerating force and pension schemes will be left behind the curve unless they make significant changes.”
The survey also found that 95% of DB schemes believe that COVID-19 has either had a positive impact on, or made no change to, their approach to governance and decision making, with 29% saying there was a positive impact on funding and investments.
Furthermore, very few schemes have updated their mortality assumption in light of pandemic, with 97% of respondents maintaining their current assumption, at least for now.
The typical scheme is around 5% ahead in funding terms compared to pre-Covid levels. While half of that comes from additional contributions, LCP said the overall improvement also reflects the robust risk management controls many schemes already had in place.
However, average interest rate and inflation hedging levels have both increased to 82% over the year, compared to pre-pandemic levels of 75% and 71%, respectively.
“Our analysis reveals that many schemes are overwhelmed by the number of issues to consider over the coming year, particularly around data and governance,” Jill Ampleford, partner at LCP.
“Trustees are having to work hard to think strategically and are focused on agreeing and maintaining a viable long-term funding plan.”
Image credit: iStock
Author: Chris Seekings