Pensions Insight: 8 to 22 April 2024

In this insight we report on recent key pensions developments including the PPF’s response to the DWP consultation on DB options, an ECtHR ruling that European Convention Human Rights encompass protection from the adverse effects of climate change and TPR’s second review of the climate-related reports that larger schemes have to produce.

PPF responds to DWP consultation on DB options and publishes revised public consolidator proposition

On 19 April 2024, the Pension Protection Fund (PPF) published:

• its response to the Department for Work and Pensions (DWP) consultation on options for defined benefit (DB) schemes which covered the Government’s proposals for easing surplus refund rules, bringing in a 100% PPF underpin and the PPF operating a public consolidator vehicle aimed at schemes that are unattractive to commercial consolidators; and
• an accompanying revised proposition for the structure of the public consolidator which follows the initial design document that was published on 1 March 2024.

We already know that the PPF supports a public consolidator and that it believes that it is ‘well placed’ to operate such a model. Its consultation response expands on this (and also touches briefly on the easing surplus access and 100% PPF underpin proposals). Key points from the response and how the design document has been updated are set out in our in-depth insight which can be found here.

ECtHR rules that human rights include protection from adverse effects of climate change

The European Court of Human Rights (ECtHR) has ruled, for the first time, in one of three climate change cases (the other two failed) that Article 8 of the European Convention of Human Rights (ECHR) – the right to respect for an individual’s private and family life – means that state authorities must adequately protect lives, health, well-being and quality of life from the ‘serious, adverse effects’ of climate change.

The claimant members of a climate change protection association set up in Switzerland were successful in their claim that Switzerland had a duty to provide adequate protection under Article 8 and that it had not done so. The ECtHR found that Switzerland had gone beyond its discretion to comply with its ECHR duties (both from a timing perspective and approach) to set up and put in place relevant climate change legislation and measures including in relation to national greenhouse gas emission limitations and a carbon budget.

Four individual members of the association also submitted claims, but these were inadmissible because the individuals could not demonstrate the requisite victim status which, for climate change cases, is high.

The Swiss Courts had also violated Article 6 of the ECHR (court access) in refusing to consider the merits of the case – they had not looked at ‘compelling scientific evidence’ on climate change and ‘had not taken the complaints seriously’.

This is a potentially groundbreaking case which is likely to result in further climate change challenges from relevant associations claiming that states have not taken sufficient steps to mitigate the effects of climate change.

(The ECtHR was established in 1959 to consider alleged breaches of the 1950 European Convention on Human Rights – this treaty sets minimum human rights standards – relevant parts are applied in the United Kingdom through the Human Rights Act 1998.)

TPR climate change review reveals trustee action

On 11 April 2024, the Pensions Regulator (TPR) published its second set of review findings of the climate-related disclosures that schemes with £1bn or more of relevant assets have to make – see here for details of TPR’s first review. TPR looked at 30 climate reports – around 10% of the total number required.

The report covers TPR’s general conclusions and sections on governance, strategy, scenario analysis, risk management, metrics, targets and continuous improvement. In each section TPR provides feedback including good practice seen, issues noted and how trustees can improve future reports. TPR notes generally that climate risk is expected to be more material for DC and open/ immature DB schemes with a proportionate approach being required in keeping with materiality.

TPR’s analysis has shown lots of examples of trustees taking steps on climate risk including:

• Net zero: more than 60% of reports had a net zero goal with a target date of 2050 or before – these targets are not required but are ‘consistent with sensible risk management’;
• DC default lifestyle strategies: being updated to provide sustainable funds;
• Low carbon tracker funds/ companies with ‘high levels of green revenue’: increased allocation;
• Considering opportunities: in areas such as forestry and green bonds.

TPR also sets out various general findings that trustees should consider in future reports such as:

• Context: schemes should provide relevant context such as scheme size, structure, default funds early on in the report;
• Materiality: reports should set out total assets in comparison to investment mandates;
• Generic wording: should be avoided where relevant and possible;
• Member summaries: should be in plain English;
• Action plans: should be included where further work is noted as being required.

As regards scenario analysis in respect of which concerns have previously been identified (see here for TPR 2023 blog on scenario limitations), TPR has seen some good practice but also has concerns.

The Transition Plan Taskforce (TPT) has also published its TPT Disclosure Framework which outlines good practice for ‘robust and credible transition plan disclosures’ to assist with the transition to net zero. TPR’s February 2024 blog suggested that trustees should familiarise themselves with the TPT’s recommendations.

Action: Although only trustees of schemes within scope are required to take specific action in response to the findings all trustees should keep up to date with developments on this area given the importance of climate change. DWP said that it would conduct a review of the governance and reporting requirements in 2023 – this includes whether the requirements should extend to smaller schemes.

Pensions dashboards: DWP annualised accrued value calculations guidance

The DWP has published guidance to assist trustees when preparing ‘annualised accrued value’ calculations for members with money purchase benefits. This is the pot value expressed as an annual income and must be given to relevant members alongside details of their accrued rights when they make enquiries through the pensions dashboard. The guidance is fairly short and sets out how the calculation should be carried out with reference to the relevant Actuarial Standard for statutory money purchase illustrations.