CalPERS, Wellington Launch Climate Risk Evaluation Framework

The $373 billion California Public Employees’ Retirement System (CalPERS), and investment management firm Wellington Management have launched a framework designed to help companies assess and disclose the potential risks of climate change on their business.

The framework is intended to improve how companies disclose their physical vulnerabilities and help asset owners and investment managers better evaluate . how companies they invest in will be able to adapt to risks.

“It is critical for us to understand how our companies are planning to adapt to the physical risks of climate change,” Beth Richtman, CalPERS’ managing investment director of sustainable investments, said in a statement.

Richtman said that without this information CalPERS can only guess what, if any, steps a company has taken to prepare for the future. “To date, we find financial disclosures have a long way to go in order to provide the type of information that we would find impactful to our investment process,” she added.

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The framework is the product of a collaborative initiative formed last September between the two institutional investors, who define physical risks as inclusive of – but not limited to – extreme heat, drought, wildfires, hurricanes, flooding, and water access.

The aim is for the framework to act as a guide for management teams to disclose how they identify, measure, and manage their exposures to these newly recognized risks. CalPERS and Wellington said the guide can help companies better relay information to capital providers, investors, markets, and regulators; meet disclosure requirements more effectively; recognize and adapt to the effects of climate change on operations; form a baseline for comparing and testing assumptions against industry counterparts; and assure investors that they take these risks seriously.

Wellington said that according to its research, many companies overlook and underreport climate-related physical risks that can be material and important to disclose to stakeholders.

The guide provides information on the different types of climate risks, and their potential effects on businesses. For example, extreme heat can damage roads, buildings, and transit infrastructure, and devastate agricultural industries. As a result, businesses may need to increase capital spending for maintenance and replacement of equipment and inventory. They may need to install sensors or other devices to measure how well their infrastructure, operations, crops, or livestock can withstand high temperatures. And they may even have to shift the geographies of their supply chains.

Drought can affect the availability, access, and pricing of water and food, and can increase costs for companies that rely on water for production or transportation. It can also hinder hydropower generation and the stability of agricultural production. Sea-level rise is one of the most significant longer-term risks, according to the framework.

“Unmitigated, its potential for destruction of coastal residential and commercial property is significant,” framework authors write, “as is the potential impact of forced or voluntary human migration and the impact on infrastructure, municipalities, and economic growth. Companies may need to adapt or relocate operations, at substantial cost.”

Wildfires, hurricanes, and flooding also disrupt business operations by damaging property or inventory, or by causing power outages or government-service shutdowns. The framework says that such events can keep customers away or prevent shipments or transport. Additionally, they may also contaminate soil and water, which could degrade consumer confidence in agricultural products and create consumer health risks.

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Tags: CalPERS, Climate Change, Risk, Wellington Management Company

The burden and risk of state pension plans are increasingly being shouldered by employees, according to the National Association of State Retirement Administrators (NASRA), which reported that more than 70% of US states raised rates for employee contributions in the past 10 years.

According to an issue brief published by NASRA, the number of state and local government employees required to contribute to the cost of their pension benefit has grown in recent years as most states that previously administered non-contributory plans now require workers to contribute. It also said that many employees are also being required to contribute more toward the cost of their retirement benefit than in the past.

“A growing number of states are exposing employee contributions to risk,” said the brief, “either by tying the rate to such factors as the plan’s funding condition or cost, or by requiring participation in hybrid or 401k-type plans as a larger component of the employee’s retirement benefit.”

The main types of risk in a pension plan relate to investments, longevity, and inflation, and NASRA said employees who are required to contribute toward the cost of their pension assume part of one or more of these risks, depending on the design of the plan.

The brief said that since 2009 more than 35 states have raised the required employee contribution rates. As a result, NASRA said that the median contribution rate paid by employees has risen to 6% of pay today from 5% in 2011 for employees who also participate in Social Security, while it has remained unchanged at 8.0% for those who do not participate in Social Security. Approximately 25% to 30% of employees of state and local government do not participate in Social Security.

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Contribution requirements for certain employee groups in states such as Missouri and Florida, which previously did not require some employees to make pension contributions, were established in recent years for newly hired employees, existing workers, or both. And employees hired in Utah before July 1, 2011 are not required to contribute to the cost of their pension benefit, however, those hired after that date must contribute if that cost exceeds 10% of pay, or 12% for public safety workers. NASRA said that because the cost of the plan remains below those thresholds, the Utah Retirement System remains non-contributory for most plan participants.

Most employee contribution rate increases approved in recent years affected all workers regardless of when they were hired, such as in Virginia and Wisconsin where new and existing employees are now required to pay contributions that previously were made by employers in lieu of a salary increase.

The brief also said an increasing number of states are using plans that use variable employee contribution rates that can change depending on the pension plan’s actuarial condition or other factors. Changes made in recent years in Arizona, California, and Connecticut require some workers to pay at least half of the normal cost of the benefit, which can result in a variable contribution rate. And recent pension reforms in Michigan require newly hired school teachers to pay one-half of the full cost of the plan, said NASRA.

Meanwhile other states are placing a growing number of public employees in hybrid retirement plans that combine elements of defined benefit and defined contribution plans, and which transfer some risk from the employer to the employee. For one type of hybrid plan, known as a combination defined benefit-defined contribution plan, employees in most cases are responsible for contributing all or most of the cost of the defined contribution portion of the plan.

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Tags: employee contribution, NASRA, Pension, Risk