Too many pension schemes focused on minimum compliance with ESG duties, says TPR

While most trustees meet their environmental social governance (ESG) duties, many achieve only minimum compliance, according to a report from The Pensions Regulator (TPR).

Published today, the Market Oversight: ESG report sets out findings from TPR's review of how pension trustees are complying with wider ESG duties.

Mark Hill, Climate and Sustainability Lead at TPR, said: “A focus on compliance only is a missed opportunity. Trustees should aim to fully demonstrate their engagement with material ESG considerations whether climate impact, nature loss or social factors and invite challenge in the interest of protecting outcomes for savers.

“While the vast majority (99%) of in-scope schemes provided weblinks to relevant ESG disclosures, we found too many smaller schemes opted for minimum compliance in respect of the content of those disclosures.”

Report findings

According to TPR’s report, a check of around 3,500 scheme returns from defined contribution, defined benefit and hybrid schemes found only around 1% failed to provide weblinks to relevant ESG disclosures – statements of investment principles (SIPs) and implementation statements (IS). And only approximately 2% of those links could not be accessed by TPR staff. Working links were requested from all schemes that provided one that could not be accessed.

Machine-reading techniques, supplemented by TPR staff, were used to review SIPs and IS from around 375 schemes. TPR also carried out an in-depth review of SIPs and IS provided by around 50 schemes.

The report also said that:

• too many smaller schemes opted for minimum compliance with ESG aspects of SIPs and IS
• if trustees believe they lack the expertise or scheme governance scale to be able manage financially material ESG risks effectively, they should consider whether consolidating their schemes could improve the way in which these risks are managed for their members
• TPR wants to see more evidence of trustee oversight where management of financially material risks, engagement and voting had been delegated to an investment manager

Pooled funds

Where schemes are invested in pooled funds, TPR said that there are still options for trustees to show active engagement and advocate for their scheme’s policies.

These include requesting that asset managers vote on issues in a way consistent with the trustees’ own stewardship priorities or joining collaborative investor initiatives.

Mark added: “Trustees must provide appropriate detail in their reporting and show they are influencing and taking ownership of ESG considerations, even where responsibilities are delegated, or where the scheme is invested in pooled funds.

“As ESG disclosure reporting requirements are likely to continue to expand, trustees may wish to voluntarily become early adopters of reporting requirements relating to, for example, nature, biodiversity and social factors.”

Notes for editors

TPR's report described minimum compliance as:

• trustees make investment decisions that protect savers and are designed to deliver good member outcomes. This includes considering financially material risks and opportunities.
  • Through ESG publication and disclosure requirements, trustees set out the action they have taken to address these risks and opportunities.
  • Between 3,500 and 4,000 with more than 100 members must publish a compliant statement of investment principles (SIP) and implementation statements (IS) on a publicly available and accessible website. Trustees must provide a link to the website in their scheme return.
  • IS should explain how and the extent to which trustees followed scheme policies on stewardship, including in relation to the exercise of rights, including voting rights and in undertaking engagement activities, set out in their SIP. This must include:
    • the most significant votes cast by the trustees, or on their behalf
    • a statement on the use of a proxy voters

    In its climate change strategy, TPR committed to undertaking a regulatory initiative (RI) to review SIPs, where trustees disclose their ESG policies, and implementation statements, where trustees explain how they followed the policies in their SIP. This RI included:

    • a quantitative review of around scheme returns. Announced in February 2023, this checked in-scope trustees had provided a weblink to their SIP and implementation statement.
    • using machine-reading techniques to review the SIPs and IS. This helped identify whether documents contained the required ESG-related content. The findings were supplemented with validation and quality assurance by TPR staff based on a sample size of around 375 schemes.
    • an in-depth review of ESG-related information around 50 schemes.

    The Pensions Regulator is the regulator of work-based pension schemes in the UK. Our statutory objectives are to:

    • protect members' benefits
    • reduce the risk of calls on the Pension Protection Fund
    • promote, and improve understanding of, the good administration of work-based pension schemes
    • maximise employer compliance with automatic enrolment duties
    • minimise any adverse impact on the sustainable growth of an employer (in relation to the exercise of the regulator's functions under Part 3 of the Pensions Act 2004 only)

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