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Strategy and scenario analysis

Issued: June 2021
Last updated: September 2022


Read paragraphs 38 to 94 of part 3 of the DWP’s statutory guidance and paragraphs 1 to 14 in part 2 of that guidance for more on the requirements on strategy and scenario analysis.

Example steps to take

Taking the following actions may help you meet strategy and scenario analysis obligations. You only have to conduct scenario analysis, as far as you are able.

Identify suitable time periods

Review and decide appropriate short, medium and long-term time periods for your scheme. Consider the type of benefits payable, membership profile and the time over which member payments will be made.

Commit to a regular review of the time periods, for example, following any material change in the scheme membership, or as part of any SIP review.

Example: different time periods for schemes with different characteristics

These are provided purely as an example. Trustees should choose appropriate time periods that work for their scheme, having taken advice on their scheme features and the likely future development of the scheme’s funding and investment arrangements.

Time period A: Closed mature DB scheme (yrs) B: Open immature DB scheme (yrs) C: Expanding DC master trust, with decumulation option (yrs)
 Short term  3 5 5
 Medium term  7 10 10
 Long term 12 25 30

Scheme (A): This is a mature DB scheme, which is closed to new members and to future benefit accrual. 

The trustees recently reviewed their investment strategy and decided to move their investments so that they are more in line with the types of assets that an insurer would hold, as they intend to buy out their liabilities in the future. 

The trustees set their: 

  • short term as three years, given the intended changes to their current investments
  • medium term as seven years, given the expected changes in climate change data quality and climate regulations 
  • long term as 12 years, in line with the duration of the scheme’s liabilities

Scheme (B): This is an immature DB scheme, which is open to new members. The trustees decide to set their:

  • short term as five years, given the expected changes in climate change data quality and climate regulations
  • medium term as 10 years, given the importance of significant changes being made by 2030 to limit global warming to 1.5°C above pre-industrial levels
  • long-term as 25 years, in line with the duration of the scheme’s liabilities

Scheme (C): This is a DC master trust which is rapidly growing and has a significant level of new contribution inflow. The scheme has recently introduced a decumulation option, meaning that members can be invested with the scheme after they have reached retirement, rather than transferring out or buying an annuity policy. The trustees decide to set their:

  • short term as five years, given expected changes in climate change data quality and climate regulations
  • medium term as 10 years, given the importance of significant changes being made by 2030 to limit global warming to 1.5°C above pre-industrial levels
  • long term as 30 years, in line with a target of net-zero around 2050

The trustees of Schemes (A), (B) and (C) periodically review the short, medium and long-term time periods they selected for their schemes in light of scheme and market developments, including, for example, material developments concerning:

  • the maturity profile of the scheme
  • climate policy and regulation
  • developments in data quality and modelling capabilities

Identify how the scheme is likely to develop

Consider how the scheme may develop over future time periods, how the membership and scheme profile might evolve, and how the investment strategy and its implementation might change.

This could include putting in place processes to review opportunities that arise from the transition to a low-carbon economy.

Integrate climate change into regular scheme activities

Make sure your investment consultant considers climate risks and opportunities in their next review of the investment strategy and its implementation. If you have not previously considered the implications of climate-related risks and opportunities for your scheme, you might decide to bring the next investment strategy review forward.

Add a climate-related risks and opportunities section to your investment performance and risk monitoring reports, including an assessment of your current investment strategy.

For DB schemes, make sure your scheme actuary and covenant adviser include consideration of climate-related risks and opportunities in their advice as part of any actuarial valuation, or as part of any ongoing monitoring or advice they provide on scheme funding and covenant. Include such risks and opportunities in your integrated risk management framework.

Speak with the scheme’s employer

For DB schemes, it is important to understand how climate-related risks and opportunities could affect the employer’s covenant. Find out how your scheme’s sponsoring employer assesses climate-related risks and opportunities over similar time periods to those you have identified.

Conduct scenario analysis

Assess the resilience of your investment strategy (and for DB schemes, your covenant and funding strategy) against at least two scenarios. Bear in mind that the purposed of scenario analysis is to draw attention to important risks and opportunities and to inform trustees’ decision making, rather than seeking a precise forecast of the future.

You must, as far as you are able, conduct scenario analysis in at least two scenarios.

  • One scenario must assume an increase in global average temperatures of between 1.5 and 2°C above pre-industrial levels.
  • We suggest that you consider that the other scenario assumes an increase in global average temperatures of well above 2°C above pre-industrial levels (in order to ensure that your analysis captures a scenario with higher physical risks).

Consider the following factors in your assessment.

  • The nature of the transition to the temperature, for example, a measured orderly transition or a sudden, disorderly transition.
  • The potential effects of the scenarios that might arise in the different time periods you identified for your scheme.
  • The potential effect of the scenario on specific asset classes and individual material holdings.
  • The potential effect of adjustments to the strategy.
  • For DB schemes in particular, the potential impact on:
    • different tranches of liabilities or liabilities with different characteristics
    • the employer’s covenant: the strength of the employer, the affordability of deficit repair contributions and its ability to underwrite investment and funding risks over different time periods, and as a result
    • contingency planning or covenant monitoring requirements

Scenario analysis may be qualitative, quantitative, or both. It might be easier to start with a qualitative approach. You should develop the sophistication of the approach and move towards using quantitative analysis, especially where you believe that climate change could pose significant risks to your scheme.

Developments that might trigger the updating of the scenario analysis.

You might decide to update your scenario analysis after significant changes in the following areas.

  • Investment strategy, for example, a higher allocation being made to matching assets following a material deterioration in the employer covenant, which reduces the trustees’ risk appetite.
  • The availability of data, for example, increased data availability following the development of their investment managers’ climate-related data reporting capability across asset classes.
  • The way the scheme's investments are invested, for example, a switch from a growth or matching structure to a dedicated cashflow-driven investment portfolio.
  • Modelling techniques or capabilities, for example, after industry reaches consensus about how some currently challenging asset holdings could be better modelled.
  • The scheme’s liability profile (for a DB scheme), for example, after a material proportion of the scheme’s liabilities is secured under a buy-in policy with an insurance company or the carve-out of some of the liabilities following a corporate transaction.
  • The scheme’s membership profile (for a DC scheme), for example, after a material growth in new business by a DC master trust.
  • The introduction of a decumulation fund (for a DC scheme), for example, after a master trust introduces a decumulation option for members, which enables them to take their benefits in retirement from the trust rather than transferring out.
  • Global policies or regulations, for example, the introduction of a carbon tax.

Example: using a qualitative approach in scenario analysis

The trustees of the EF scheme have recently started to consider climate-related risks for their scheme. It is a DB scheme, and the sponsor covenant is currently rated ‘tending to weak’, the scheme is underfunded, and a 12-year recovery plan is in place. The sponsor’s main business operations are heavily carbon dependent, and the sponsor has only recently started to develop plans to reposition the business towards a low carbon economy.

The trustees arrange for their advisers to run a scenario analysis workshop to help them understand the options available and the best approach for their scheme.

Following the workshop, the trustees understand that:

  • the nature of the investments held in the scheme means that there is currently limited data availability and options for analysis
  • scenarios represent possible futures, not predicted futures
  • the scenarios they select should represent the type of future temperature increase and policy pathways they consider most relevant
  • the scenarios they use should be clearly differentiated and that they need to understand the limitations and specific assumptions underpinning them

Given the current limitations, the trustees decide to start with qualitative analysis, intending to move to quantitative analysis as they gain more experience. They ask their advisers to illustrate how qualitative scenario analysis might be used to understand how climate-related risks and opportunities might arise, impact investment and funding strategy and be used to inform the trustees’ decisions.

They suggest the illustrative analysis is based around an increase in the price of carbon of 50% in 2025, followed by a further increase of 50% in 2030, and three different transition profiles for the scheme and sponsor.

  • A no change transition where the sponsor does not transition and the scheme assets continue to be invested as currently expected.
  • A managed transition, where the sponsor’s business and the scheme investments transition to a 30% lower exposure to carbon by 2030.
  • An accelerated transition, where they both reduce their carbon exposure by 60% by 2030.

The trustees acknowledge that projecting covenant over longer horizons is challenging for their covenant adviser but believe industry sector views can provide some insight. They ask their covenant adviser and their investment managers for their industry sector views. They then ask their investment, covenant and actuarial advisers to develop a qualitative narrative around each of the transition profiles.

They extend the analysis to include: ’What if the covenant deteriorated to weak or the sponsoring employer became distressed?’ They use the outputs to inform some high-level analysis and support a workshop discussion about the likely impacts on the scheme’s funding and investment arrangements.

The trustees use the insights they gained to help develop a refined range of qualitative scenarios to consider with support from their advisers.

Document the resilience of your scheme

Clearly document your analysis of what the scenarios, and the transitions within them, mean for your scheme. Incorporate your findings into your wider governance of climate-related risks and opportunities, for example, your work on risk management.

What to report


Read paragraphs 92 to 94 of part 3 of the DWP’s statutory guidance for what you must describe in your report. A summary is set out below.

When reporting on the steps you have taken, you must describe:

  • the short, medium and long-term time periods you have identified for your scheme
  • the climate-related risks and opportunities relevant to the scheme over the short, medium and long term
  • the impact of the risks and opportunities on your scheme’s investment strategy (and in the case of a DB scheme, your funding strategy)
  • the most recent scenarios you have used in your analysis
  • the potential impacts identified in those scenarios on the scheme’s assets and liabilities (and if you have been unable to obtain data to identify potential impacts for all the assets, you must explain why)
  • the resilience of your investment strategy (and in the case of a DB scheme, your funding strategy) in these scenarios
  • if you decided not to conduct new scenario analysis outside the mandatory cycle, why that is the case

You should also describe:

  • the reasons for choosing the scenarios you have used
  • the key assumptions for the scenarios you have used and the key limitations of the modelling
  • any issues with the data or its analysis which have limited your assessment within the context of ‘as far as they are able’

You may include information in your report on any other aspects of the assessment of your investment strategy (and in the case of a DB scheme, funding strategy) and scenario analysis that you consider would be helpful to disclose.

Risk management