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Auto-enrolment pension savers could face significant losses due to poor climate risk practice

A new report by ClientEarth and ShareAction has revealed that millions of pension savers, including those signed up under the government’s auto-enrolment legislation, may face significant future losses due to lack of action from pension providers and their regulator on climate risk.

The report by the NGOs says that contract-based pension providers have not taken sufficient action to address climate risk. The FCA, which regulates these providers, has so far failed to investigate or address this problem even though it has identified climate change as a risk to it meeting its regulatory objectives.

This leaves the FCA out of step with The Pensions Regulator, which oversees trust-based pensions, and may leave contract-based pensions vulnerable to losses.

‘Most at risk’

Those most at risk are savers whose money is invested in default funds. This includes 90% of defined contribution pension savers, many of whom have been signed up under recently introduced auto-enrolment rules. Crucially, these savers do not have the right to choose their own workplace pension but they bear the risks and costs of investment, relying on their pension providers to manage these risks.

Pension schemes have a uniquely long-term investment focus and so it is concerning that the industry is being so slow to properly consider long term risks that might shrink the pension pots of their customers.

Joanne Etherton, Pensions Lawyer at ClientEarth, says: “The FCA is failing millions of pension savers with its weak position on climate risk. An industry blind spot has been developing and must be addressed. The pensions of millions of savers could be seriously threatened if the FCA does not step up.

“As the regulator the FCA has a duty to protect consumers and we are concerned that its failure to require providers to consider and manage climate risk and keep up with other regulators could amount to a serious underperformance in its duty to savers.”

ClientEarth and ShareAction are encouraging the FCA to use its upcoming joint pensions strategy with The Pensions Regulator, as well as the opportunity to prepare an adaptation report for DEFRA, as ways to ensure that the gap in regulation is closed and to give confidence to savers that their pensions will be subject to robust and equivalent regulation on climate risk, no matter how they are structured.

“Baffling” lack of action

Rachel Haworth, Senior Policy Officer at ShareAction, says: “The FCA has confirmed that climate change poses a risk to it meeting its regulatory objectives, so it is baffling that it still seems to have no plans to take action on this issue.

“Financial regulators around the world are stepping up to the challenge of protecting financial markets and consumers from the risks associated with climate change. The FCA must not be left behind.”

To compile the report, ClientEarth contacted twelve pension providers, including major players such as Aviva, Scottish Widows and Legal & General, representing more than 11 million workplace pension scheme members.

The clear message from these providers was that the industry needed guidance on how to factor in climate risk when investing on behalf of pension savers. Two pension providers (Legal & General and Scottish Widows) formally endorsed this recommendation to the FCA.

ShareAction conducted a review of annual reports published by the Independent Governance Committees (IGCs) tasked with ensuring that contract-based pensions provide value for money to consumers. The review found that only two IGCs reported on climate risk and that, where they did, insufficient detail was given in relation to the fund’s policy or investments.

Climate risk is the financial risk that climate change poses to investments through a physical threat to infrastructure and the risk of rapid policy change to accelerate the move to a low carbon economy.

Widespread agreement

It has been identified by many national and international financial institutions, including the Bank of England and the Financial Stability Board as posing a material financial risk to investments.

The FCA is responsible for the regulation of contract-based pension schemes and ClientEarth and ShareAction’s report recommends that the regulator: ‘should take urgent action to address climate risk and issue guidance to the firms it regulates to ensure that providers consider and, if necessary, take steps to manage climate risk and ensure the suitability of pension investment products’.

The NGOs also advised the FCA to require IGCs to report on pension providers’ climate risk policies in line with recommendations issued by the Law Commission.

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Gian-Reto Tarnutzer