Peers move to fix confusion at heart of pension sector

By Tom Nguyen, Peers for the Planet

The UK is one of the world’s leading financial centres and holds the third largest stock of pension assets globally. In an age of mobile capital, how UK financial services and pensions are regulated have significant implications for both climate and nature.

That is why, as the Pension Schemes Bill completed Committee stage in the House of Lords last week, Peers for the Planet (P4P) supporters from all sides of the House pressed the Government to address issues around the role our pensions play in financing fossil fuels and in assessing the risks posed to portfolios from climate change and rising biodiversity loss.

Clarifying trustees’ duties

In particular, there have long been calls to clarify the legal definition of pension trustees’ fiduciary duties – obligations that ensure those who manage other people’s money act in savers best interest.

Many pension funds argue current legislation leaves uncertainty about how trustees should act to protect and boost savings in the context of systemic issues like climate change and changes to standards of living. To address this, P4P Director Baroness Hayman tabled a cross-party amendment to embed clearer investor duties directly into the Bill, proposals which were informed by organisations including @ShareAction and the @Impact Investing Institute.

The lack of clarity around these duties can have real-world implications for members’ interests further down the line. Some estimates suggest UK pension portfolios could decline by more than 25% by 2040 under plausible climate scenarios. At the same time, research from @FinanceInnovationLab indicates at least £10.5bn of UK pension assets remain invested in companies extracting or burning coal — exposure that could become increasingly risky as global demand declines.

In the Commons stages of the Bill, the Government acknowledged the uncertainty this is creating and proposed introducing statutory guidance to deal with this. However, the proposed guidance would exclude major schemes, including the Local Government Pension Scheme and workplace pensions — together representing around £1 trillion in assets. Peers also raised concerns about the limited detail on timings and lack of acknowledgement that new legal powers will be required to introduce the proposed guidance.

In response, Ministers recognised the urgency and committed to clarifying how legislative powers would be secured, while accepting in principle that guidance should create a consistent framework across the other pension schemes.

P4P Peers also pushed for faster divestment from coal, one of the most damaging contributors to climate change, as well changes to explicitly require pension managers to weigh up the impacts on funds from biodiversity risks. In reply and as a positive step forward, the Minister placed on record that “some pension funds could, and should, be doing more” to reduce portfolio exposures to coal.

What next?

The debate showed clear cross-party agreement: greater clarity around investor duties and climate impacts is needed. The key questions now are scope, timing — and whether new guidance alone will provide the legal certainty trustees require. As the Bill moves to Report stage, we will continue working with Peers and stakeholders with the aim of securing a durable pensions framework for identifying and managing systemic climate and nature risks and opportunities — that is in the long-term interests of savers and fit for purpose to deal with the increasing climate, nature and broader systemic risks we are facing.