Pensions Industry set to spend over £13m in putting ESG policies in place
We’re Going Green – but at what cost for smaller DB schemes?
Imagine a world in which 4,500 smaller defined benefit pension schemes in the UK each pay around £3,000 to create an ESG policy. Collectively, company sponsors would be spending around £13.5m on meeting this regulation. Money that could be contributing to pension deficits for members.
Each policy would also need to be reviewed and signed off by trustees, and if we assume this takes around 2 hours of trustee time for each trustee this could be around 9,000 hours of work across the industry.
ESG would also need to be discussed and debated at every board meeting in the future – more time and money.
We don’t need to imagine. This is the world we are currently moving towards.
But what are the alternatives to this? At Stoneport we are pleased to announce that we will run one ESG policy for all members who join our consolidator scheme.
It’s World Energy Day on 22nd October and as the world is in the midst of an energy crisis, this event has arguably never been more significant.
With global leaders meeting for COP26 in Glasgow at the month end, Boris Johnson announcing a strategy for decarbonising Britain by 2050 and Buckingham Palace being lit green to celebrate the first Earthshot prize, ‘going green’ has a new sense of urgency.
In the pensions world, new regulations, and increased consumer demand for sustainable investments, also mean that Environmental Social and Governance (ESG) has never been more topical for pension schemes and trustees.
Research from River and Mercantile, conducted by the Pensions Management Institute (PMI) earlier this year found that the vast majority (98 per cent) of defined benefit (DB) pension scheme trustees viewed environmental, social and governance (ESG) integration as a pressing priority for the year ahead.
New regulation is now driving change. A new governance and reporting framework in relation to climate change risks was introduced on 1 October that initially will impact pensions schemes with assets of £5 billion or more, authorised master trusts and authorised collective money purchase schemes.
The regulations – The Occupational Pension Schemes (Climate Change Governance and Reporting) Regulations 2021 and the Occupational Pension Schemes (Climate Change Governance and Reporting) Regulations 2021 follow recommendations from the Task Force on Climate-Related Disclosures (TDFD) reporting framework.
They require new reporting from trustees who will need to oversee relevant climate change risks, communicate with scheme members how their pensions are exposed to climate risk and how investees companies are being held to account for reducing their carbon emissions.
To deliver these requirements, there are costs involved. The reporting structure will need to be built, robust governance processes will be required, and trustees will need to spend a great deal of time overseeing governance, considering risk management and reviewing all the reporting processes.
This is the first wave of regulation and by 1st October 2022, schemes with £1 billion or more will also have to comply. While smaller schemes are exempt right now, many are thinking ahead about forthcoming regulations. Some want to take a proactive approach to embed ESG in their reporting and create policies now ahead of future regulation. But a key barrier for these smaller DB schemes are the costs involved. At Stoneport things are different.
With us, all the costs, governance and reporting requirements for ESG for our members will be taken care of by trustees at Stoneport and, as a smaller scheme, employers and trustees can start communicating their ESG credentials to their members at a much lower cost than going it alone.