Pensions are locked in the ESG debate

By Sara Neidle

This past month we have seen the final covid restrictions being lifted and things starting to get back to normality. For the pensions industry however, we are a long way from being in a period of calm.

As inflation has risen, there has been much debate around the pensions triple lock. It is understood that Rishi Sunak is considering a temporary suspension of the triple lock on state pensions by linking this year’s rise to inflation instead. With the impact of the furlough scheme last year, it is likely to leave wages more than 8% higher than last, adding more than £7bn to the state pensions every year. It has been reported that one option is a “double lock” for one year only, which would raise pensions by the larger of 2.5pc or September’s Consumer Prices Index inflation. Other options are being sought ahead of a final decision next month.

A big issue that is not going away anytime soon is around pensions and ESG. With regulations under the Pensions Schemes Act 2021 due to come into force in October, the impact of ESG considerations is becoming an essential part of pension schemes, and trustees are under continued pressure to consider climate-related risks and opportunities, and exercise effective stewardship. David Fairs, TPR executive director of regulatory risk recently said that “pension schemes investment performance and funding may suffer” as a result “which could mean savers missing out.” The Pensions Regulator (TPR) issued a consultation this month on guidance designed to help trustees meet tougher standards of governance in relation to climate change risks and opportunities. The TPR has stated it wants trustees and their advisers to play a key part in shaping the guidance.

Further to this, the Work and Pensions Select Committee questioned pensions minister, Guy Opperman in an oral evidence session as part of the Committee’s inquiry into pensions stewardship and COP26. During the session, the minister was questioned about whether pension schemes are committed to moving to net-zero yet, and how confident he was that trustees were equipped to handle what was being asked of them. To that, the minister responded: “We are damned if we do and damned if we don’t. If we don’t ask trustees to step up to the plate and embrace the consequences of climate change, we will be massively criticised…” He also noted that “It is a big learning curve [for Trustees] but there is an awful lot of guidance.” To add to this, Make My Money Matter (MMMM) has called on the UK’s largest defined benefit schemes to commit to “robust net zero targets”. This marks yet another industry-wide push for climate action.

In other news, the funding surplus of the UK’s 5,300 corporate defined benefit pension schemes dropped from £50bn to £10bn in July, according to PricewaterhouseCoopers (PwC). Its Pension Funding Index showed that the drop was driven by growth in liability values, which increased by £80bn from June to £1,840bn amid falling gilt yields.

In policy, the government announced measures last week around plans to raise minimum access age to pension pots from age 55 – 57 by April 2028, which is also when the state pension age is due to rise from 66 to 67. The idea behind increasing the normal minimum pension age is to stop people running out of money. Yet others will suggest that it’s unlikely it’s going to change people’s behaviour and make much difference in retirement. Looking ahead, August is a notoriously a quiet month in the political calendar, with Parliament in Recess until 6th September and much of Whitehall taking some time off. Parliament then returns until the 23rd September, when it will rise for the Party Conference season. Quite what Party Conferences will look like this year is still slightly unknown.