Most UK Pensions Taking Steps to Manage Climate Risk

Most UK pension funds have taken steps to manage their climate change risk, according to the results of an inquiry launch by Parliament’s Environmental Audit Committee.

The committee launched the “Green Finance” inquiry to scrutinize the government’s strategy to develop “world-leading Green Finance capabilities,” and investigate how investment in longer-term sustainable development can be incentivized.

“It is encouraging that a majority of the UK’s largest pension funds say they are taking steps to manage the risks that climate change poses to UK pension investments,” said Mary Creagh MP, chair of the Environmental Audit Committee. “But a minority of funds appear worryingly complacent. Pension funds should at least assess the exposure of their assets to the physical, transition, and liability risks from climate change that will materialize during savers’ lifetimes.”

The inquiry responses were separated into three main categories based on what the pension self-reported about its engagement with climate change: a “more-engaged” group, an “engaged” group, and a “less-engaged” one.

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The “more engaged” group say they are taking steps to assess and minimize their exposure to the physical and transition risks presented by climate change. These pension funds support recommendations on climate financial disclosures, and most are either considering, or already have committed to reporting in line with these recommendations.

The “engaged” group acknowledges climate change as a risk, but often sees it as one of the many environmental, social, and governance (ESG) factors that has to be dealt with. While the group has some responsible investment policies in place, there was less evidence of this being implemented in specific investment decisions. The group also exhibited greater caution about committing to climate-related financial disclosures, although some are considering it.

And the “less engaged” group has not formally considered climate change as a strategic risk, and there was little reported evidence of strategic input or oversight from the pensions’ governing body. The group does not plan to report on climate risks and opportunities in line with recommendations on climate-related financial disclosures.

Among the largest pension funds, 11 were in the “more-engaged” group, eight were in the “engaged group,” and four were in the less-engaged category.

Seven of the largest pensions have committed to report on the climate change risks and opportunities facing their funds in line with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). Eight say they are considering how to respond, and another eight say they have no current plans to report in line with TCFD.

Earlier this month, the Environmental Audit Committee released a report saying that there has been a “dramatic and worrying collapse” of low-carbon energy investments since 2015 that threatens the UK’s ability to meet its carbon budgets. The report said that, in cash terms, investment in clean energy fell by 10% in 2016 and 56% in 2017, and that annual investment in clean energy is now at its lowest since 2008.

Tags: Climate Change, Environmental Audit Committee, ESG, Pension, UK

Despite rising funded levels, US public retirement systems are “more vulnerable than ever” to the next economic downturn, according to a report from The Pew Charitable Trusts.

In preparation for the next time the economy heads south, and to strengthen their long-term financial health, several states have undertaken stress test reporting, the report said. Pew said the practice “can show policymakers how adverse economic scenarios could affect retirement system investments and state budgets.”

Pew said eight states—California, Colorado, Connecticut, Hawaii, New Jersey, Vermont, Virginia, and Washington—now require their public pension systems to analyze the impact of downturns on pension costs and liabilities, financial market volatility, and contributions. Pew also said that stress testing allows states to account for the condition of their economy and tax collections, and offer a broad view of how pensions impact their overall fiscal health.

“The ability to consider the impact of a range of economic conditions on pension balance sheets and government budgets helps policymakers evaluate whether current policies are sufficient to withstand the impact of the next recession,” said the report. “Over the past decade, many state officials learned that overly optimistic investment return assumptions caused gaps in pension funding that had to be covered by increasing contributions and reducing benefits, often several times.”

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Pew said the testing provides the information needed to evaluate policies and adjust investment assumptions over time, which can help ensure retirement plans are affordable and fully funded during various economic scenarios.

For example, Pew said its analysis of plans in New Jersey and Colorado found that without “significant policy intervention,” the pension systems in both states risk insolvency if a recession hits, and investment returns are lower than expected over an extended period.

The report said that since the Great Recession of 2007 to 2009, state tax revenues have been slower to rebound than after the three previous downturns, and that revenues have been more volatile than in the past. It also said the gap between retirement fund assets and liabilities had grown each year from fiscal year 2000 through 2016, despite increased pension contributions, benefit cuts, and stock market gains.

Pew also found that although most state pension systems have lowered their assumed rates of return, the level of portfolio risk that states are taking on to meet their investment targets “has never been higher.”

It said the median return assumption in fiscal 2016 was 7.5% for public pension plans, despite the fact many analysts expect investment performance to be a full percentage point lower, with a one in four chance that returns may not top 5% over the next 20 years.

“Against this backdrop, more states are looking at stress testing to give policymakers a better sense of potential funding scenarios,” said the report.

Tags: Economic Downturn, Pension, PEW Charitable Trusts