Pensions Insight: 29 January to 12 February 2024

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In this Insight we report on four recent key pensions developments: a Financial Law Markets Committee paper on how trustees make decisions on sustainability and climate change; a TPR cyber incident report which sets out some key steps for trustees dealing with a cyber incident; TPR’s report on the impact of the 2022 LDI episode on DB funding; and auto-enrolment developments.

FMLC paper on sustainability and climate change trustee decision-making

The Financial Markets Law Committee has published a paper on the legal position and ‘uncertainties and difficulties’ regarding trustees’ fiduciaries duties around investment decision-making on sustainability and climate change issues. The findings may be equally relevant to other areas such as nature, environment, community and biodiversity.

“In each case the lens is that of the purpose of the scheme and the proper, lawful use of trustee powers to achieve that purpose (including by reference to applicable time horizons), based on an appropriate decision-making process.”

The Financial Markets Law Committee is an independent body that “seeks to reduce legal uncertainty in the financial markets”. The paper has been drawn up with input from both legal and non-legal entities. It has been produced following the Government’s recognition that trustees wanted further ‘information and clarity’ on their fiduciary duties and stewardship. It follows on from 2014 and 2017 Law Commission reports on fiduciary duties and investments and considers developments since these reports were published.

The paper provides helpful insights into the difficult issues surrounding how climate change and sustainability should and can be taken into account by trustees including the following:


It is the trustees that are responsible for making decisions, not their advisers. They should not ‘rubber-stamp’ advice. This means that trustees must understand what the advice covers so they can make sure that relevant matters are being taken into account (a key requirement in decision-making).

Trustees’ primary investment duty and financial/ non-financial factors

A trustee’s primary investment duty is to balance return against risk – financial factors are those which are relevant to this duty (and they are broad in nature).

Non-financial factors have been described by the Law Commission as being factors that could influence investment decisions that are motivated by other concerns.

The important distinction between the two is motive.

The paper provides further detail on the differences between financial and non-financial factors. This is important because trustees must take financial factors into account in investment decision-making but the extent to which they can take into account non-financial factors is understood by the Law Commission to require the trustees to have good reason to think that members share the concern and for the decision not to involve risk of significant financial detriment.


Sustainability is “integral to decision-making ... where it may affect financial return or risk” and in a pension scheme context should be considered at ‘entry point’ as a financial rather than non-financial factor. When balancing risk and return it will often be the case that the scheme as a whole and the economic and financial systems in which it exists are relevant considerations.

Climate change

Climate change needs to be considered in a wider setting than just legislative requirements. Trustees need to be mindful that climate change developments can happen without warning and the current position may not align with the existing investment strategy.

There is increasing dispute and litigation in this area – risks can be present worldwide and they can endure beyond the investment holding.

Climate change and sustainability effects are relevant to the scheme’s risk and return and over varying time horizons. Climate change needs to be considered from both a scheme asset perspective and a wider economic one.

There are new considerations as regards climate change including that non-financial returns/ risks can develop into financial ones, and it might be necessary to think of whether shorter-term gains should be disregarded because they may risk longer-term investment return sustainability.

Investments which are labelled as having a positive effect on sustainability and climate change may reduce financial return, but these types of investments can still be properly considered if risk and return are the considerations taken into account.


The paper provides a useful recap of how trustees should make decisions and the process that should be followed. For example:

  • It is proper for trustees to place the scheme within a broader economic setting and to obtain information on current views on climate change and sustainability.
  • Because trustees do not make day-to-day investment decisions, they can assess matters at a higher level rather than just making decisions on specific investments.
  • Trustees are permitted to exercise their judgement in the context of the purpose of the scheme and acting in the interests of the scheme beneficiaries.


Stewardship of the investment after it has been made is important – trustees should effectively communicate their expectations to other parties and adequately oversee investment managers to ensure risk and return are being adequately mitigated and supported. It is proper for trustees to ‘encourage’ responsible corporate stewardship behaviour.

Numbers and narrative

The paper highlights that making decisions on financial factors means more than just looking at the numbers. Narrative explanations of quantitative advice are important.

The paper provides important guidance on this increasingly important area of investment decision-making and will be useful for both trustees and advisers. It analyses the legal issues and provides practical assistance on how climate change and sustainability can be taken into account when investing.

The key takeaway is perhaps that addressing risk and return in investment decision-making includes:

“Taking into account which investments and which investees address risks [and return] in the context of sustainability and the subject of climate change … This is relevant to the proper exercise of investment power, and that is a matter for all pension schemes.”

TPR regulatory report on recent cyber incident: Lessons learned and key steps

The Pensions Regulator’s (TPR) 2 February 2024 cyber security incident – regulatory intervention report details TPR’s liaison with a large pension scheme administrator following a March 2023 cyber security incident that affected the administrator. Although TPR does not regulate administrators it does work with them on relevant matters such as this.

The report provides some useful ‘lessons learned’ for trustees and outlines key actions for trustees when dealing with a cyber security incident.

Lessons learned/ TPR expectations


A scheme’s cyber security and business continuity plan should include a range of scenarios to ensure that relevant roles, responsibilities and systems have been tested should an incident happen. This includes understanding how a third party will react if an incident occurs.

Communication issues

Identifying exfiltrated data: The incident showed that trustees should not ‘underestimate’ the work involved in identifying exfiltrated data and matching this to schemes and members. Do not delay contacting members if there is a reasonable possibility of risk to their data.

Responsibility and contact details: Trustees should remember that they retain responsibility for scheme data held by former service providers. Trustees also need to keep their contact details up to date through Exchange – change of trustees is registrable information that needs to be notified to TPR usually within five working days.

Cyber security incident: Key steps trustees should take


Contact the employer and service provider early to assess how the scheme/ members are impacted – prioritise benefit payments, retirement processing and bereavement services.


Consider whether TPR and the Information Commissioner’s Office need to be informed. Materially significant breaches of law also need to be notified to TPR.

Key service operations

See if key services and interfaces with other parties can be operated in a safe manner – restore affected services when appropriate – inform members and regulators as necessary.

Immediate safeguarding

Assess whether immediate steps are needed to protect members’ benefits.

Member communications

Keep members appropriately informed and direct them to the National Cyber Security Centre guidance for individuals on data breaches. Significant cyber incidents will require NCSC support.


Monitor transfers for increased or unusual requests and provide relevant scam warnings to members.

Action: Cyber incidents are on the rise and schemes are a particular target risk as they hold significant amounts of personal data and assets. TPR revised its cyber security guidance at the end of last year and its new general code also details its codified expectations on cyber controls. Trustees should ensure that they have a suitable cyber incident response plan, put cyber risk on the risk register and satisfy themselves that relevant service providers are managing cyber risk appropriately.

TPR review of impact on defined benefit (DB) pension schemes following the Liability-Driven Investment (LDI) episode

TPR’s report on the impact on DB pension schemes following the 2022 LDI episode (produced in response to a recommendation made by the Work and Pensions Committee when it investigated the matter) (see our insight) confirms the following headline points:

Over calendar year 2022, TPR estimate that DB pension schemes:

  • Assets: decreased by c£425bn, representing a 24% decrease in overall value, mainly due to drops in the value of gilts, corporate bonds and property;
  • Liabilities: decreased by c£575bn (33%), mainly because of gilt yield improvements, a result of the significant fall in gilt yield values; and
  • Funding: on technical provisions basis increased in aggregate by c15% from 103% to 118% largely because the decrease in liability values was more than the drop in asset values.

TPR also noted that:

  • Individual schemes’: performance would largely dependent on scheme-specifics. Schemes with higher growth asset levels and lower hedging saw the highest increases over 2022; and
  • Impact of LDI: it was not able to ‘generalise’ on the LDI impact on scheme funding due to hedging strategies being dependent on the specific risks being mitigated against.

In conclusion:

“The situation in late September 2022 and early October 2022 brought into sharp focus the size and scale of DB pension schemes’ overall investments in leveraged LDI. However, overall, the movement in gilt yields over 2022 led to a significant improvement in DB universe scheme funding over the year ...

The true impact of the events of 2022 for the whole universe will not be known in full for several years, as each scheme goes through their tri-annual valuation process establishing the ultimate impact on their own scheme funding position.”

Auto-enrolment (AE) round-up

Earnings trigger and qualifying earnings band

The Government has confirmed that the earnings trigger that determines eligibility for being automatically enrolled into a qualifying pension arrangement for 2024-2025 will stay at £10,000 and the lower and upper earnings limits for the qualifying earnings band will remain at £6,240 and £50,270 respectively.

Consultation on AE changes

The Government plans to consult on the removal of the LEL and the reduction of the enrolment age to 18 at the ‘earliest opportunity’ – this consultation follows the introduction of the Pensions (Extension of Automatic Enrolment) Act 2023 which requires regulations to be introduced to implement the changes.

Alternative quality requirements

The Government’s findings of its 2023 review of the alternative quality requirements that DB and hybrid pension schemes use for automatic enrolment are that the alternative quality requirements for UK DB schemes “should continue to remain in place without changes at this time”. The alternative quality requirements allow a scheme to show that it meets relevant AE requirements through satisfaction of alternative quality tests which are designed to be simpler than the test scheme standards that would otherwise apply and which were found.

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