Pensions schemes and climate change - member engagement

Joanne Tibbott: Hi everyone. Welcome to the second in our series of Pension Schemes Act 2021 Webinars. Thank you very much for joining us. Today we are going to be focussing on the climate change reporting aspects of the new legislation. What trustees need to do to ensure that they meet these requirements but also, with our guest speakers from Hymans Robertson, looking at how you may be able to use this information to engage with your members with the ultimate goal of achieving best outcomes for our members.

So I think we can all… probably have seen in the press over recent weeks, there has been a huge amount on climate change. From Boris bringing forward in the UK for reducing carbon emissions by 15 years last week. To Joe Biden's climate change summit, where the US has pledged to cut carbon emissions by 50-52%25 below 2005 levels by 2030. So some really, really stretching but important goals there.

And I think, from my perspective, climate change really started to hit home, probably around four years ago. I will just move the slides on. And this actually is a picture of my son Jack, it is his eighth birthday today, and this is in Canada on the Athabasca Glacier which is between… on a road called the Icefields Parkway, an amazing road between Banff and Jasper. We were out in Canada visiting some relatives and interestingly my husband and I had been there ten years prior to that and the place where Jack is standing, ten years prior to that there was ice and it has shrunk to significant levels just over that ten year period.

So for me that really hit home and I think working in the pensions industry where pension schemes are asset owners of billions of pounds worth of assets, we can really make a difference and influence some of this stuff. But also, at the same time, remembering trustees' fiduciary duties and making sure that we are making decisions that are in the best financial interests of members.

So just with that scene set, what we are actually going to cover today are the legal requirements - what does the Pension Schemes Act require? What are the underlying regulations? And what does the statutory guidance say? What are you actually going to have to do as trustees and by when?

And then we have got William Chan from Hymans who is Head of DC Research. He is going to look very specifically at the investment considerations that trustees need to take into account and how they go about doing that. And then Rona, a DC Partner at Hymans, who is going to really look at how we can use this information to better engage with our DC members and get them interested in pension saving.

So turning first to the legal requirements and I am going to handover shortly to my colleague Mary Verity who is going to take you through these. But the four things that we are going to cover are just a bit around climate risk and the legal context, why are we looking at this from a legal perspective? Why it is in the Pension Schemes Act. What is actually changing and importantly, for trustees, what you actually need to do and what should you be doing now to make sure you are ready for the fast approaching deadlines that are in place, certainly for some of our larger schemes and authorised master trusts. So, Mary handing over to you.

Mary Verity: Thanks Jo. Yes, just to reinforce really what Jo has been saying, climate change is a unique risk and it is a risk and something that impacts every household. It is also really urgent as well and I think that is why the regulatory changes are coming in so quickly.

So the Pension Schemes Act 2021 got royal assent on 11 February and it brings specific climate change provisions into pension's law for the first time. It refers explicitly to the Paris Agreement goal of keeping the increase in the global temperature to well below two degrees above the industrial levels. But the Act itself does not really go into the sort of minuet show, the detail of everything, probably because it is such a complicated and technical area.

So instead the detail of the new measures are set out in some draft statutory guidance and also two sets of draft regulations which were published in January of this year alongside the DWP second consultation on climate change. And the draft regulations reflect the recommendations of the task force on climate related financial disclosures. So already quite a lot of information there. But in a nutshell, what all of this means is that trustees will need to meet a couple… a number of governance requirements which require them to consider in depth how climate change is going to affect their scheme.

They will need to report on how they have complied with those requirements and they will need to also comply with the new trustee knowledge and understanding requirements about identifying assessing and managing climate change risks and opportunities. So it sounds like a big job and I think few trustees will have developed plans to quantify and address risks and capitalise on opportunities of the transition to the zero carbon economy already. But do not worry there is lots of guidance out there as we will come on to see.

And so… I have already mentioned that there is some statutory guidance and that is actually really helpful.  In fact trustees are going to have regard to that when they are meeting their obligations that are set out in the regulations. But there is also some non‑statutory guidance which has been penned by the Pensions Climate Risk Industry Group. Which is a cross government and industry group which was formed in 2019 and that non‑statutory guidance is called "aligning your pension scheme with the TCFD recommendations" and it is specifically for pension trustees and designed to help them meet their legal responsibilities.

So I keep talking about TCFD, what is that? And what are their recommendations? Well TCFD stands for the Task Force on Climate Related Financial Disclosures as I have already mentioned and their recommendations were actually published back in 2017. They are aimed at all organisations across the investment chain and call on them to identify, assess, manage and disclose climate related financial risks and opportunities. And their aim is to introduce a flexible framework to enable decision useful forward looking information on the financial impact of climate change risk.

They are structured around four dramatic areas, which I have set out on the slide there, and they represent the core elements of how organisations operate, so governance strategy; risk management; metrics and targets. And both the non‑statutory guidance and the draft regulations follow those headings. I have paraphrased on the slide what the regulations require in each area and I was just going to take each in turn to try and get under the bonnet a little bit of what the text actually means.

So just staying on this slide then and looking at governance first. This area is all about trustee oversight and processes. It is a recognition that trustees whilst they are ultimately responsible for the schemes' governance measures, it is actually others who will be doing a lot of that work for them. So what trustees need to do is ensure that they have got good processes in place to hold those that are undertaking the work on their behalf to account and to question them and, if appropriate, challenge them on what they are doing.

So those undertaking or advising or assisting with governance activities could include employees of the scheme, so the pensions manager perhaps.  Or employees of the sponsor, so if you have got an FD who is kind of involved in the trustee board, perhaps as an interested observer or something like that, and also external advisors and the most obvious there is the investment consultants and fiduciary managers.

So trustees are going to have to clearly define what the roles and responsibilities of those people are and they might find it helpful to do a skills audit as well. It would also be good to include any of those responsibilities in advisor agreements. I think it is worth just pausing for a second to mention that the time and resources that trustees spend on doing this is going to depend on lots of different factors. So the type of scheme, the maturity of the scheme, the extent to which the sponsor of the scheme, if it is a DC scheme, is exposed to climate change risk and the requirement to have governance processes in place needs to be assessed on an on‑going basis. And trustees might want to amend their governance processes, that they have put in place at the outset, over time.

So for example if they… once they have been through their scenario and analysis, which I will come on to talk about in a minute, decide that some of the scheme's assets are particularly vulnerable to climate change risk. They might have to change the sort of the head on governance processes to be a bit tighter and to address that.

So just moving on to strategy, here the requirement is that trustees need to, on an on‑going basis, identify climate change risks and opportunities which they consider to have an affect over the short, medium and long term and assess their impact on the scheme's investment strategy and for a DB scheme, funding strategy. So making sure the sponsor's exposure is reflected.

I am just going to pause briefly here to distinguish, on the one hand, between physical risks associated with climate change, so global warming causing for example the wild fires in Australia or rising sea levels. And also transition risks, on the other hand, so the risk that an investment loses value or, even worse, becomes stranded because investors just do not want to invest in it any more.

To help them understand kind of what to do, the regulations also require trustees, as far as they are able, to undertake scenario analysis every three years on the impact of the scheme of at least two scenarios where there is an increase in global average temperature. One of those scenarios being a temperature rise of between one and a half and two degrees above pre‑industrial levels. So, in other words, in keeping with the aim that was set out in Paris Agreement of 2015.

The statutory guidance does recognise that scenario analysis could be qualitative rather than quantitive and it sets out some of the examples of different scenarios. The most obvious ones being firstly a measured orderly transition, so effectively the one that the regulations are aimed at making sure happens, so lower transition risk and less severe physical risk. Another scenario would be a sudden disorderly transition, so if nobody does anything, does not put any climate policies into place, no action is happening until it is too late, then your transition risks are much more likely there.

And also the final one is a hothouse world, so sort of linked to the one that I just mentioned. Climate goals are being missed and the physical risks are really high. Just a couple of things to mention here, so the first is that although the analysis has to be undertaken every three years, it is actually subject to annual consideration about whether that timing is appropriate.

And also just that the regulations on both governance and strategy do mention opportunities explicitly. So, for example, if, at the start of a scheme's climate change journey, it finds that it holds nongreen assets, that can actually be a potential opportunity for the trustees, or those undertaking governance activities on their behalf, to demonstrate effective stewardship and use their influence to make those assets greener.

The other thing I just wanted to mention and hammer home at this stage is that the scheme's own time horizon is of course really relevant here. So the impact of climate change risk and opportunity on a scheme that is near buy‑out is going to be very different to that for an on‑going scheme.

So risk management next, the key take away for me on this piece is integrated risk management, a scheme's exposure to climate change risk is going to be specific to the circumstances of the scheme and linked to all sorts of other considerations that the trustees are juggling in the interests of members. So a really obvious example for a DB scheme is the impact of climate change risk on the employer. The trustees are going to have to consider how the sponsor's exposure correlates to the schemes' own exposure via its investments and whether, taken together, the investment and funding strategy are sufficiently prudent.

For a DC scheme, trustees might want to think about consistency of their climate change risk assessment with, for example, perhaps approach to costs. Maybe when they set the default fund they were very cost conscious and they might be invested in pool funds and that might mean that they have got less opportunity to make changes relating to climate change risk to the underlying portfolio. And that said, obviously stewardship and engagement could be used as an appropriate tool in that scenario.

So finally metrics and targets - now there is a lot of jargon in this bit, so I am actually going to gracefully direct you to the really helpful statutory and non‑statutory guidance for more detail, but I will try and summarise what is required in a nutshell.

So trustees need to select three metrics where one is an absolute emissions metric which means that the total greenhouse gas emissions of the assets of the scheme; one is an emissions intensity metric which is the total CO² emissions per unit of currency invested; and then one other metric relating to climate change. And they have got to review that selection from time to time as appropriate for the scheme.

So to be able to calculate the first two metrics, trustees are going to need to know what the scope one, two and three greenhouse emissions of the scheme's assets are. So there is obviously an obligation on the trustees to obtain those and they have also got to get the data that they require to calculate their other metric as well and that needs to be done on an annual basis as far as they are able. We will come on to just look at that in a bit more detail in a moment.

And the other thing to note is that trustees should use the most recent data available even if that means using different dates for different asset classes. I told you there was a lot of jargon but broadly, just before I move on, scope one in greenhouse gas emissions are the direct greenhouse gas emissions from the activities of an organisation and two and three are each different types of indirect greenhouse gas emissions. I think I am just going to leave it there and just move on to targets.

So trustees also need to set a target for at least one metric and annually measure performance against it and also review whether that metric should be retained or replaced. And just one thing to note here is that the metric is non‑binding so you know if that is missed… if that target… sorry, one thing to note is that the target is non‑binding, so if that target is missed then nothing kind of happens. But obviously as we know and we will come on look at, the TCFD report will include that so it is obviously an incentive to try to meet it.

It is also just worth highlighting that multiple scenario analysis and metrics are required because the legislation is really aiming to make sure that trustees get a good overall picture of climate change risk that is affecting their scheme. So just moving on just to think about this wording in the legislation as far as they are able.

So I think that is just the other really important thing to talk about. Hopefully will give you some comfort, and that is that the DWP recognises that the underlying information which is needed for trustees to be able to perform all those calculations and comparisons that I have just been talking about might not be all available at once.

Certainly the governance of obligations for bigger pensions schemes are actually coming in before the requirements for asset managers, corporates, lenders, insurers, who are going to face their own disclosure requirements from 2022 or 2023. And helpfully the FCA has said that it will be mindful of the information that occupational pension scheme trustees are going to need when they are prescribing the disclosures that asset managers are going to make.

So these disconnected timetables do mean that some pension schemes will have to make disclosures before their asset managers do and as a result of the obligations to assess the emissions of the scheme and measure metrics only as far as the trustees are able because after all trustees can only work to the data that exists. Over time trustees will be more able, as the underlying data becomes available, so at the moment what this means is that trustees should be taking steps that are reasonable and proportionate in the circumstances, taking account of costs and time.

There is not any expectation that the trustees should spend a disproportionate time filling non‑material gaps and the statutory guidance says that trustees should prioritise engagement on persistent data gaps which are most likely to be material to assessing climate change risk. It also highlights that qualitative assessments might be appropriate where a quantitive approach is not possible and also just to sort of note here that any data gaps is going to need to be explained in the TFCD report, so it is not a licence to not try but it just needs to be proportionate.

I think it has been done this way round because it is a bit sort of "customer is always right" so if an occupational pension scheme, as the end user, wants the climate change data then its advisors will go out and get it, so this approach is helping drive compliance more quickly. Just moving on then to think about timing, when is all of this happening?

So the new requirements are going to be phased in depending on scheme size so for the bigger schemes, and by that I mean £5 billion plus along with master trusts, are coming in from October this year. A scheme that is midway through its scheme year on that date will only need to comply with the requirements for the remaining part of the scheme year. Then the first public disclosures, the so called TCFD reports will need to be made within seven months of the end of the scheme year in which the governance requirements start to apply.

So just to give you an example to put that into context. For a scheme that has got £5.5 billion of assets on 1 March last year, which is the measurement day. And a year end of 31 December, that scheme is going to have to comply with the TKU and governance requirements from 1 October this year and report for the period 1 October 2021 to 31 December 2021 and produce its TCFD report by the end of July 2022.

The next wave of schemes is those with £1 million plus assets on 1 March this year. Those schemes are going to need to comply in the same way from a year later so from 1 October 2022 for the governance and TKU requirements and the end of July 2023 for disclosure and the governance is going to be reviewing the position for smaller schemes with less than a billion of assets in 2023.

So once the scheme has produced its TCFD report, what does it need to do with it? Well this is going to sound fairly familiar to you. It is going to need to be published on a publically accessible website free of charge. In the manner that allows for the content to be searched by search engines and it needs to be signed by the Chair and the website address needs to be signposted to members by the annual benefit statement and, if relevant, the annual funding statement. It should also be included in the annual report and accounts and if the annual report and accounts is electronic then it needs to be included as a hyperlink.

So just moving on to think about accountability. Obviously having to publically disclose what you are doing and your targets on climate change means that you are accountable to members and the wider public. I know that Rona is going to be talking, in a few moments, about going a step further and using climate change action as a lever to generate member engagement. So I will not say any more about that now other than to say that the approach is very much supported by the non‑statutory guidance and UK stewardship code and it seems to me to be complete common sense and present a real opportunity to drive up member engagement.

So moving on, the TCFD report is also discloseable to TPR on the scheme return and there is a new framework for TPR to enforce compliance with a new governance and disclosure requirements. TPR has got a discretion to impose a penalty where a TCFD report is inadequate or there is a failure to signpost it and those penalties are the usual levels that we all know about, so £5,000 for an individual or £50,000 in any other case. But there is also a mandatory penalty of £2,500 where there is no TCFD report published at all.

Another option is that TPR can issue a compliance notice. On 7 April actually, so pretty recently, TPR published its new climate change strategy and that suggests that TPR's preferred approach is to identify how it can help and support trustees to meet the challenges of compliance in the first instance. That makes sense given that the aim of all of this is to create better outcomes for members by driving trustee action. It is definitely worth a read and I think we have got a blog coming out on it, really soon actually.

So just to reflect, what should trustees being doing now? Well we have been through the timing of when the new requirements are coming in and I think it will be a really good idea to make sure you know when your scheme is going to be affected. For most schemes that is probably going to be on 1 October next year so you really need to start thinking now about what you will be doing to be able to produce a TCFD report in due course.

And you will also need to comply with the new TKU requirements from that same date. So another first step would be to have some training so that you can understand it all and what your metric options are and the transactional physical risks of your investments and your sponsor, if that is relevant. And then once you have had that training you can move on to setting your investment objectives and beliefs. You should think about the alignment of those with those of your investment consultant and also the consistency of any mandates you have currently got in place.

At the same time you should be thinking about your investment advisers and asset managers' climate competence so a signatory status, have they signed up to the UN principles for responsible investment and UK stewardship code? How active are they on climate change? And there is actually an annex at the back of the non‑statutory guidance with ten questions that can help you to be able to do that.

And for a DB scheme, as we keep mentioning, the employer provident is really, really important and affected by climate change risks so, in due course, you can ask the sponsor for its own TCFD disclosures once they are available and climate change risks should be included as part of your covenant monitoring between valuations.

So that was all I was going to say, quite a quick canter through as there is a lot to cover. So if you have got any questions I think we will be taking those over at the end and I was going to hand over to William who actually I think has a question for you.

Joanne: Hi, so you have got a chat function on your screen, so William's question is "what is the largest source of greenhouse emissions, carbon footprint for supermarket chains like Tesco, Sainsbury's and ASDA?" So if you want to put your responses in the chat function, I can have a look at those and shout those out to William who will reveal the answer later on in his presentation.

I have had distribution, William, refrigeration, transport costs in the supply chain… more coming through… transportation of goods to the supplier, so all sensible and good answers so it will be interesting to see what the answer is in due course. Transportation seems to be one of the key ones coming through. Okay, so I will hand over to you William. Thank you.

William Chan: Thank you. Thanks Jo and great answers from the audience. So Mary talked a lot about the risks involved when it comes to climate change and I think the important aspect about this is that there is a spectrum of risks and generally you can divide those up into two categories. The first category, which is on the left hand side, relates to, what if the world does enough to reduce emissions and to reduce global temperatures?. So we call those transition risks essentially and that is on the left hand side.

On the other hand the world may not do enough and you can get significantly higher temperature rises and increases in sea levels for example. We tend to group those in the sort of asset management communities physical risks. Now the best way to think about this, by way of example, is via sort of two types of companies. The first is an oil company which is affected more and more by transition risks. And I will come onto commercial property which is more affected by physical risks later.

But firstly the oil company. So if you transition to a low carbon economy, generally what happens is oil revenues will be impacted. Generally you will find that those types of companies may have to think about research and development. May have to think about ways to transform the business model and eventually and potentially go into areas such as renewables and so on and so forth. Now that is a big risk, so if the world does enough that is a big risk for those oil companies and they will be disrupted more so than other companies and other business models.

If I flip over to the right hand side, the physical risks - we think about commercial property so office buildings, hotels, I guess their main impact will be via, for example, if they are near the coast, or if they are in regions where there are extreme temperatures and so either significantly colder or significantly warmer. Now that has impacts on air conditioning and heating; making your tenants comfortable; making customers, using those properties, feel comfortable. That is a big part of physical risk.

Now culminating all that into what it actually means for pension schemes and companies. Well it actually hits their bottom line and so this is why climate change and climate risk is what they call a financially material consideration and hence it is a significant part of what needs to be considered by trustees as part of the scheme's statement method principles. And so you can see, in the bottom of that slide, there is a number of various dimensions of DC and DB consequences when it comes to climate change, so not only just investment returns but also general economic concerns; employer contributions and obviously mortality. So that, I guess, is a holistic summary of climate change risk as it impacts not only pension schemes but, more broadly, companies and the globe.

On to the next slide which is currently on the screen now. So we view climate change as multi‑dimensional. You may recognise some of these circles on the screen here as part of the code of practice for DC schemes. What we say in terms of multi‑dimensional aspects of this is that there are some very obvious aspects of climate change most notably, as I mentioned, the investment strategy. My colleague, Rona Train, will soon talk about the communications reporting aspect so things like member engagement.

There is also some sort of second order effects which should be actually quite important for when it comes to DC and DB pension schemes. For example, the connection between investment strategy and what your employer is doing. So if your employer is thinking about climate change in a certain way, one obvious question to ask, as a trustee or as a governance committee, is to ask "well, if my employer is doing it well why shouldn't the pension scheme and the pension scheme's investment follow suit?" Is that a worthy consideration? So that is something that should be thought about.

Mary also talked about trustee training. So there is a timeline which I will come onto a little bit later, there is a specific timeline for climate change and TCFD disclosures to take place. But, before that, there needs to be some sort of set up. So there needs to be a set‑up of investment beliefs; set‑up of training TKU; and various other measures, all leading up to those dates seven months after the scheme year end for example.

And then obviously there is… if you look at this slide again, there is other sort of lesser order impacts, but still quite important so administration and looking at how the trustee board meets for example. So even something like you know the balance of face to face meetings versus virtual meetings does have a carbon footprint impact relative to meeting virtually.

So now I mentioned the timeline earlier so that is the next slide in the deck. And the timeline breaks down what Mary said, just in a little bit more detail, because it provides some guidance as to what trustees can get training on either from their investment advisors, their legal advisors and other advisors. And so on the top row there you have got master trustee schemes greater than £5 billion and say you have a scheme year end as at 31 March 2022, so seven months after that is October 2022.

But even before that there is a lot of prep work required so asking your consultants about skilling up on TCFD, asking and talking to your asset managers or getting your consultants to ask on your behalf around what their portfolio disclosures are and helping them to populate what it means for your DB or DC strategy. And then on that second row there is an example of this scheme with greater than £1 billion so if they have a year-end of March 2023, they probably should start doing something next year in preparation for their TCFD report seven months after that date.

Now I mentioned earlier that there were some great answers coming around from the survey of the question around the largest source of greenhouse gas emissions for supermarket chains and the answer actually, surprisingly I thought, because when I surveyed my colleagues on this, the answer did come back… transportation was probably the highest sort of polling answer. But surprisingly to me… but by far the largest direct emissions is the energy and the refridgerance, so the chemicals used for the refrigeration units in store and in your delivery vehicles.

So I make this point to highlight very importantly that in a legal sense the fiduciary duties, so acting in the best interests and the best financial interests of members is very important and still is the most important consideration. So when it comes to climate change, when it comes to transition risks and when it comes to physical risks we still need to think about this in the context of fiduciary duties. Is the scheme being governed to act in the best financial interests of members?

And this example actually works quite well in the sense that if you are Tesco, Sainsbury's and ASDA for example and you have got your shareholders, you have got pension schemes investing in your supermarket stocks, you do need to think about how to go about transitioning to a lower carbon economy. And it is not a quick fix because you could cut your carbon emissions by almost half if you switch off all your refrigeration units and you do not deliver fresh or frozen food to your customers. You could do that very easily. You could do that tomorrow.

But that would actually be quite detrimental to your share price, it would be quite detrimental to your customers and it would be quite detrimental to your employees because, quite frankly, if you are not selling fresh and frozen food, you will probably lose a big part of your customer base. So that means that fiduciary duty is very important.

What we are looking for as investment buyers and what asset managers will be looking for is, do the supermarket chains have a plan to invest, to think about their time horizon and to think about ways to invest in technology for example? That does save on the carbon footprint measure but not make it so that it is a major decision, impacts customers significantly and actually hurts their customer base and their bottom line.

If you translate that to pension schemes, the principles are the same, so we need to think about this in the context of risk adjusted member outcomes and so we need to think about, for example, whether climate change related equities and bond portfolios do in fact improve those risk adjusted member outcomes. Now, as a house view, Hymans Robertson does believe in that but it is an area that more and more academic research is coming out and so we are looking towards that as signposts to back up our particular statements and our particular house views and investment beliefs.

Now obviously another approach to all this is to think about member engagement and so I will hand over now to Rona to talk about how that impacts on DC schemes in particular when it comes to climate change and climate change risks.

Rona Train: Okay, thanks very much William. Well I recently attended a meeting with the Department for Work and Pensions, along with a number of other representatives from consultancy firms and pension law firms. And one of the questions they posed to us was, do people read the Chair statement for the DC scheme?

Well to be honest it was not a very long discussion but it has been quite pleasing to see that the DWP announced recently that they would actually be revisiting the purpose and format of the Chair statement off the back of those discussions that we had. And if we think about why people do not read Chair statements.  I think there is probably four reasons behind that. Firstly, they are long; secondly, they are complex; thirdly, to be honest, they are written by people like us who understand pensions. And finally they contain lots and lots of numbers which the majority of scheme members and, I dare to say, maybe some trustees do not fully understand.

But I also think there is another reason and I speak regularly to a lady called Janette Weir of a company called Ignition House. She has spent a lot of time, over recent years, talking to DC pension members on a wide range of subjects and in total she reckons she has spoken to about 15,000 DC members.

And one thing she told me was that people just do not understand that their money is invested. Many see their pension contributions as money that they have effectively lost. It is like tax and national insurance that is coming off their pay every month, rather than something that is invested for them. And, of the members she has talked to, very few have any understanding at all of where that money actually goes.

But if we could find a way to get people to understand that money that comes off their salary every month is actually their money and that it is growing over time, we should at least be able to make some process on helping our members understand and, importantly, also appreciate the value of their pension savings.

So the Defined Contribution Investment Forum carried out a survey in 2020 that asked DC pension members how they felt about their pension and this showed some very interesting results. So 80%25 of those surveyed said they wanted their pension to do some good; 65%25 said that they would have more trust in their pension if they thought it was invested responsibly; and, critically in terms of generating better long term member outcomes, a massive 50%25 said they would contribute more to their pension.

And we have actually seen this at first hand in our pension scheme at Hymans where a number of our members increased their contributions after we introduced ESG tilted funds within our default arrangement. Finally, when it comes to returns, around a third said they would be prepared to have either lower returns, higher costs or higher risk if they knew that their money was being invested responsibly.

Now I fully appreciate that there is always going to be a positive bias in surveys like this, but we carry out a lot of member surveys and focus groups through our work with our DC clients and there is a definite shift to a greater interest from members in things like climate change. And also, interestingly through the pandemic, more on social issues as well. But how can we practically use responsible investment and in particular climate change to engage our members without overwhelming them?

I am sure I will not be popular saying this, but sadly a TCFD disclosure document is not going to do that. There is a lot of information on responsible investment, investment on providers' websites and fund managers' websites, but for me that is the real problem - there is a lot of information. In an age of short attention spans, I think the average it takes to get somebody's attention now is about eight seconds. We need to be able to grab people's attention quickly and, wherever possible, make things as relevant as possible to them. And, in our view, using real life stories on the impact that a members' pension savings can have, can be really powerful.

So here I have shown on the left hand side a two pager, that we have been developing with our clients, that aims to grab members' attention and we have seen this done very successfully in other industries. We have shown on the right hand side some examples of the type of headlines we could use with our members. So how good would it make a pension scheme member feel to know that the money that is invested in their pension savings has helped to convince Shell to link their executive pay to carbon emissions? And also to help convince Unilever to give greater disclosure of the impact of their use of palm oil on the destruction of rain forests?

Well incidentally members will probably never have heard of Unilever but they will have heard of Pampers and Ariel, so it is the presentation of this that is really important as well. And these are the things people can actually relate to and we see this as a really important and key area of development in the future.

So our efforts to engage members are also being supported by both industry initiatives and technology developments. We have all seen the programmes on TV of David Attenborough, of Greta Thunberg and others and we have watched the stories on the news about extinction rebellion. We should not forget that our members are watching these programmes too. I am sure you will also all by now have heard of the Nick My Money Matter campaign, that was launched by Richard Curtis of Love Actually Fame and a number of others. This is actively seeking to encourage pension scheme members to question the fiduciaries of where their pension savings are invested and demand that they are invested in a more sustainable future.

Now the campaign is already backed by many big names in the pensions industry including NEST and it is continuing to be in traction. It has had coverage in some of the main stream press and some of our clients are already starting to get more questions from their members asking about where their pension assets are invested.

And tech also has a big part to play in this and several of the DC platform providers including Legal and General, Aviva and most recently Cushon are rolling out a new and exciting tool called "tumelo" which will allow members to vote directly on key company resolutions. And, critically for me, what this is doing is it is presenting both sides of the argument to allow members to make informed decisions. Now the information on voting is then fed through to the fund manager and the fund manager will actually look at the results of this and will consider it, although not be bound by what members are saying in their own voting.

But again it is also important that the trustees or governor's committees of pension schemes will be getting useful management information through on what their members are saying and what their members are most interested in. For me, at the most basic level, it will let members see where their money is invested and, if nothing else, that will help to get over the issue of members not knowing where the money is going from their pay at the end of the month.

So, as I said, we believe this is a great opportunity right now to use responsible investment and, in particular, climate change as a way of engaging our DC members, but that engagement needs to be simple, it needs to be down to earth and it needs to be as relevant as possible to our members. So my question to you today is, are you up for that challenge?

I have just provided some useful links here in the slides in case you want to know any more details on any of these or please come back to me for some more details.

Joanne: Okay that is brilliant. Thanks very much to our speakers. I think this is a massive topic and we have probably barely scratched the surface but I hope you found that a useful session and we have had some interesting questions through. So we have got about ten minutes or so left so perhaps if we try to cover some of those questions now. So the first question William is one for you. So how often are your clients evaluating your consultations against the ICSWG Consultant Climate Competency Guide? What are they concluding?

William: So at the moment, I think we are starting that process to having those requests coming in at the moment and I think it's too early to say what they're concluding. I hope that the conclusion is that we're competent advisors in this space, but those requests are coming through at the moment.

Joanne: Great, thank you. I think it's early days, still, with a lot of this stuff, but I think we're going to start seeing it developing at pace now. Thank you.

So, Rhona - one for you, and this, I think, was on your penultimate slide - I hope I pronounced it correctly!  In what situations are you recommending text solution, such as Tumelo, to help trustees engage more effectively with their members, including, for example, expressing some proxy voting preferences?

Rhona: Yep. I mean, absolutely - that is something that is drawing as I mentioned on the slides. Several of the big platform providers are introducing this for clients now, and in fact, I've just come off a meeting this morning of our own staff scheme governance committee, where we were having a presentation on Tumelo and how we could use that for our own members at Hymans. I think it is something that will engage people and, to me, with something like Tumelo, people don't have to get down as far as doing the voting. But one thing it will do is it'll show them what's in the portfolio, which, at the moment, people don't have a clue on. So I think there's two steps to this. One is getting them to understand that their money is invested and then getting them to engage. One of the questions we asked this morning was are the fund managers actually going to look at what members are saying? It was a very much a "Yes, that will be taken into account" because we're beginning to see what topics people are interested in and what their views are, so yes, I can see that drawing quite significantly in future.

Joanne: OK, thanks very much, Rhona, and then we've also had a couple of questions on schemes that are sort of thinking about buy-in, buy-out and what they need to do, so perhaps one for you, Mary, if that's OK? So, are you advising your clients to do adequate due diligence of the insurer receiving the buy-outs on the management of their climate change risks to ensure no trustee liability down the road if the insurer is impaired by those risks, down the line?

Mary: So, I think that a couple of things really. I think trustees have always been looking at how good the insurer is. How good for the money it is, the covenant - is it a reputable name, all of that type of stuff already, because quite a lot of trustees are paternalistic towards their members. I think the climate change risks stuff will be added into that as well. Of course, don't forget the insurers themselves are gonna be subject to these requirements very soon anyway in the same way as the biggest pension schemes and probably around the same time as the timetable for the £1b+ schemes really. So again, it is early days but I think that actually it will be one of the considerations, amongst many, that trustees are taking into account, because it's an important issue and they care about their members.

Joanne: I think that's right, and I think also that's the case when schemes are assessing employer covenant as well if they're not moving to an insurer just part of the overall covenant assessment, I think that will become a very important part and parcel of it as well, so yeah, I agree with that.

Rhona: Joanne, just to add in, yes, we are already seeing clients taking that into account when they're looking at risk transfer, so it is already happening.

Joanne: Thanks, Rhona. Yeah, it's helpful to know what's going on in practice, because one of my follow-up questions to the panellists was going to be in terms of the schemes that you work with and you advise, where are trustees that are in scope or might be in scope in the following wave? What are they doing? Where are they in their TCSD journey, if I can call it that? I don't know, Mary, if you want to take that first?

Mary: So I think that most of my schemes are just in the training phase really at the moment. This, especially the climate change stuff, it's really new. Schemes might have had some training on ESG already, and so this is just building on that, but yeah, I'd say most schemes have either had some training or they're certainly getting some in the diary or are deepening that training and that understanding, I guess.

Rhona: I think from our perspective, it's very much the same - it's the training and the next step is looking at the metrics - what's out there? What can we actually get hold of at the moment in terms of measurements, and which of those are going to be most relevant?

Joanne: Yeah, and I think that's really the million dollar question, isn't it?

William: And in my schemes, when it comes to an investment point of view most schemes over the past few years have started to think about so they might in the past detract a market cap weighted passive index. They have or are starting to think about a, for example, a low carbon index, or managers which are slightly more active when it comes to ESG and that will also help them when it comes to the ultimate disclosure requirements and assessing things like value for members.

Joanne: OK. Thank you, and then, a question really for any of the panellists, really, but thinking about schemes that have assets under one billion who will ultimately come into scape down the line, but how much of this work priority reporting needs to be done for schemes under one billion? Should they be thinking about it yet, or is it really waiting to see what the government comes out and says will be in place for these schemes?

Don't know if anyone has a view on that?

Mary: I will just jump in, and then anyone else can supplement what I'm saying. I guess the first thing that comes to mind is those schemes aren't swap-free. They've already got ESG obligations, and all of that stuff came in, started coming in a couple of years ago, so lots of the stuff on climate change is feeding into SIPS and into implementation statements and any scheme that has to produce those with more than 100 members, so it is much broader. 

I think that, given the direction of travel on this, and just the tenor of the non-statutory guidance as well, it's very much encouraged. The non-statutory guidance which is based on the TCFD recommendations very much views itself as being an essential tool for the schemes that are in scope but best practice for the smaller schemes that aren't yet. There's definitely a recognition as well across the piece of trustees just doing what's proportionate and reasonable in the circumstances, so smaller schemes obviously have got a lot less resources available to them to throw at all this stuff which is why there's that trickle effect of it coming in for bigger schemes first. So I think the expectation is that they should really be acting in a trustee-like manner and should be doing what they can because ultimately, climate change is a financial factor. There is a risk of assets becoming stranded in due course etc, so it all plays through into that anyway.

Rhona: I guess I would like to William's point as well, in that, what we're seeing is a lot of our DC clients in particular inviting their companies' CSR teams to come along to client meetings to present what the company as a whole is doing on climate change and other social matters. And then actually having a constructive discussion with the employer in terms of how far they might be expecting the pension scheme to go, and we've not yet got to a situation where an analyst has come into a company and said "I like what you're doing on diversity. I like what you're doing on climate change with the company, but what are you doing in your pension scheme?" I think it's probably only a matter of time until that does come, particularly, for companies where they have really big pension schemes and do have the ability to make a real difference through the investments of them.

Joanne: Great. Thank you. We've probably got a couple of very short questions before we wrap up, and one is more a practical question for hybrid schemes, I guess, so the TCFD requirements, if you've got a DB and a DC section, do they apply to both sections? How should schemes approach that?

Mary: I'll take that one, Jo. So, yeah, if you've got a hybrid scheme, effectively, you're doing your scenario analysis and setting your metrics twice so separately for both separate sections and I think it's fairly obvious that that would be the case, because both of those two bits are completely subject to separate considerations.

Joanne: Great. Thankyou. A final question, which kind of links to the point that you were making before about the proportionality and how far trustees have to go. So if you've got a scheme that is within scape, so five billion plus assets, or one billion in due course, but they're substantially on the road to buy-in or buy-out, to what extent do they need to comply with these requirements? Is there a get-out, so to speak?

Mary: I'm happy to take that one as well. I think it's similar to my answer for the schemes under a billion, which is that climate change is part of ESG already. There are definitely lots of requirements already in place and actually it's all part and parcel of actually the investment considerations that trustees are having to think about and their fiduciary duties in respect of that, so it's not that there's nothing that applies, but all of the new stuff that's coming in is very much alive to the scheme's specific circumstances and time horizons are talked about quite a lot, and the trustees duties are to the members of their scheme first and foremost, so the time horizon which a scheme buy-out is obviously very short is absolutely really important, and I think that the scheme that's near to buy-out will definitely need to be taking that into account…delicately, of course, but yeah.

Joanne: OK. Well, that's great. Well, I'm conscious we're really close to 1 O'clock, and I'm sure the panellists and also the attendees are ready for lunch, so just to say thank you very much to our speaker today for a really interesting session. I think we'll be hearing a lot more about climate change. It's certainly not going go away, and I think we all have an important role to play in advising our clients, and as trustees of schemes in getting this right. If you do have time, we'd really appreciate you completing the feedback form which will appear when the presentation ends, and once again, thanks very much for attending. Thank you. Bye.