TCFD reports: do you need one after a full buy-in?

Trustees of occupational pension schemes exceeding £1 billion in relevant assets are required by the Occupational Pension Schemes (Climate Change Governing and Reporting) Regulations 2021 (the “Regulations”) to report on how the trustees maintain oversight of climate-related risks and opportunities which are relevant to the scheme. Trustees usually do so via a ‘TCFD report’ (borrowing its moniker from the less catchy Task Force on Climate-Related Financial Disclosures). Failure to correctly publish a TCFD report on time is one of only two statutory requirements that carries a mandatory penalty, with a minimum fine of £2,500 and a maximum of £5,000 where the trustee is an individual or £50,000 where the trustee is a corporate body.

Producing a TCFD report is an involved process which requires significant engagement from the trustees themselves, as well as legal, actuarial and investment advisers, but they are only required where a scheme’s “relevant assets” exceed a certain level. So, can trustees who have recently transferred the majority of their assets to an insurer as part of a full buy-in scrub the preparation of a TCFD report from their to-do list? The answer, unfortunately, is no but there is scope for a reduced scope in certain areas.

How does completing a buy-in affect the obligation to produce a TCFD report?

Broadly speaking, trustees must publish a TCFD report in respect of any scheme year in which the scheme has relevant assets equal to, or exceeding, £1 billion as at the scheme year end date. The report must be produced within 7 months of the end of the relevant scheme year and must be published on a publicly available website. For schemes in scope, Regulation 3(5) rather ambiguously says that the requirements “cease to apply from any subsequent scheme year end date on which the scheme has relevant assets of less than £500 million”.

Whilst a buy-in contract is a hugely valuable asset for a scheme, it is not a relevant asset for the purposes of the Regulations. The Regulations define “relevant assets” as the “the net assets of the scheme recorded in the audited accounts for the scheme year less the value of the assets of the scheme represented by any relevant contract of insurance recorded in those accounts”. A buy-in contract will generally be a “relevant contract of insurance” for these purposes.

From the drafting of Regulation 3(5), a trustee could be forgiven for thinking that a TCFD report is not required for the scheme year in which the completion of a buy-in results in the scheme’s relevant assets falling below £500 million, i.e. interpreting “subsequent scheme year end date” as requiring an assessment of the scheme’s relevant assets on the last day of the scheme year in which the buy-in takes place.

However, the DWP’s October 2022 statutory guidance suggests this is not the correct interpretation. Paragraph 15 of the guidance reads: “Where a scheme’s relevant assets fall below £500m on any subsequent scheme year end date, the trustees will cease to be subject to the climate change governance requirements with immediate effect (unless the scheme is an authorised scheme). The trustees must still publish their TCFD report for the scheme year which has just ended within 7 months of the scheme year end date, unless one of the exceptions in regulation 6(2) applies.”

Regulation 6(2) only exempts trustees from producing a report if the scheme’s relevant assets on the year end date are zero. This will not be the case after buy-in as schemes tend to retain a small residual asset pool for payment of expenses etc.

When read in conjunction with Regulation 6, Regulation 3(5) can be read in a way that is consistent with the DWP’s guidance, in that as long as a scheme was subject to the requirements for part of a scheme year, trustees still have to produce a TCFD report at the end of that scheme year. Essentially, the “subsequent scheme year end date” means that the requirements no longer apply beyond and from the scheme year end date but do not remove the obligation to prepare a report in respect of any period up to the scheme year end date. 

Can a trustee take a lighter-touch approach to a post full buy-in TCFD report?

Whilst one further TCFD report will be required and trustees should be careful they meet the minimum legal requirements for such reports, the good news is that the final report does not necessarily have to be as fulsome as previous, pre buy-in, iterations. A number of the requirements in the Regulations impose obligations on the trustee to undertake scenario analysis, obtain data and measure performance “as far as they are able”. Paragraph 25 of the Schedule to the Regulations clarifies what this means, stating that the Trustee is required to “take all such steps as are reasonable and proportionate in the particular circumstances”, taking into account the cost and time required to be spent in taking those steps. 

Given the residual assets the Trustee will have control over after buy-in will be minimal, and the time horizon to buy-out the scheme is likely to be relatively short, it seems defensible that a more pared-back approach to far-looking climate impact analysis is proportionate, particularly given that a TCFD report will not be required for the following scheme year. The appropriate approach will depend on the particular circumstances of a scheme - your legal, actuarial and investment advisers can provide advice and specific suggestions catered to your scheme’s circumstances.