Pension warning: DWP to introduce ‘green’ climate change measures on retirement pots

Pension: Expert gives advice on preparing for retirement

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Earlier this week, the DWP made it mandatory for pension schemes to publish a metric showing how ‘green’ their investments really are. According to the department’s latest climate and investment report, this metric will examine investments that are aligned with the Paris Agreement goal of limiting global temperature rises to 1.5 degrees Celsius above pre-industrial levels. According to the DWP, this specific requirement will reveal the climate risk of over £1.3trillion investments to British pension holders.

Following the Paris Agreement and ahead of COP26 in Glasgow, the Government hopes this new measure will push for more sustainable investments in the private sector and pressure energy intensive firms to ‘decarbonise’.

Earlier this week, DWP Minister Thérèse Coffey MP outlined the department’s “green” vision for pensions going forward and what has been doing to push the climate agenda.

Ms Coffey said: “I want to focus on one part of this country’s formidable financial sector that has huge investing power, and that is – pension funds – and the opportunities there are for greener pensions and how they can help us reach net zero.

“Pensions provide millions of people with a secure financial footing for later life and I am proud of the work we have been doing to get more people saving and to make the pensions system safer, simpler, more transparent – and greener.

“Over 10 million more people are now saving for their retirements thanks to automatic enrolment – and they are saving more, with contribution rates having risen to eight percent.

“We have created a new type of pension scheme – Collective Defined Contribution. We are progressing our pension dashboards.

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“And through the recent Pension Schemes Act, we have introduced a range of new duties for those involved in running pension schemes, as well as created new powers to protect pension savers.”

Through the Pensions Act (2021), the earlier 2004 act has been amended and the Pensions Regulator is set to receive a wealth of new powers, which will include climate-focused measures.

In reaction to the Government’s Pension Schemes Act, Tom Selby, head of retirement policy at AJ Bell, warned that the DWP’s lofty ambitions will “not be easy” due to the massive task at hand.

Mr Selby explained: “The fight against global warming now has a firm footing in the pensions of millions of Brits, with the Pension Schemes Act 2021 placing a new emphasis on schemes to consider the climate change impact of the investments made on the behalf of members.

“Today’s proposals take this a step further by proposing the UK’s largest pension schemes publish a metric which shows how aligned people’s retirement pots are to achieving the Paris Agreement goal of limiting global temperature rises to 1.5oC above pre-industrial levels.

“The Government hopes that by shining a light on the environmental impact of pension investments, over £1.3trillion of assets will be marshalled towards companies and funds that are either sustainable or have set out concrete plans to ‘decarbonise’.

“Given the significant investment heft of retirement funds it makes perfect sense for policymakers to use pensions legislation to try to force through change.

“However, this will not be easy – devising reliable metrics on the environmental impact of stocks and funds is not an exact science, while trustees of pension schemes will continue to prioritise maximising long-term investment returns for members.

“Many would argue these aims can – and indeed should – go hand-in-hand.

“What’s more, just because climate reporting metrics are mandated, it doesn’t necessarily guarantee either a shift in investment focus or the broader member engagement needed to really push through meaningful behavioural change.

“Ultimately achieving the Paris goal requires a seismic shift in the way we as a society act, with improved disclosure representing just one piece of the puzzle.”

Chancellor Rishi Sunak is set to announce further fiscal policies related to climate change is his Autumn Budget announcement next week.

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