Climate change is rapidly becoming the ‘defining’ risk factor when looking at longer-term investment strategies, funding positions and retirement outcomes according to a new report from the Society of Pension Professionals.
This Pensions in a Warming World report, published just a week after the UK baked in record June temperatures, warns that climate change is no longer simply an environmental issue for schemes, but an economic, financial and governance challenge that could reshape investment returns, inflation, employer covenant strength, insurance markets and the long-term value of pension savings.
The report warns that schemes cannot diversify away from a changing climate, given their exposure to the wider economy and the long-term nature of retirement promises.
It examines how different climate pathways, from early and co-ordinated action to delayed transition or escalating physical impacts, could produce significantly different outcomes for DC and DB schemes, as well as looking at the specific challenges for CDC and public sector pension schemes.
The SPP warns trustees, sponsoring employers and providers that delayed action could increase exposure to market volatility, policy shocks and systemic economic disruption. It also highlights the impact of physical climate risks on insurance markets, infrastructure, property and economic productivity, alongside growing governance challenges around data quality, regulation, fiduciary duties and stakeholder expectations.
The SPP says effective climate governance is becoming a core part of prudent long-term pension management, with schemes needing to consider how climate risks could affect both assets and liabilities over time.
SPP president Calum Cooper says: “Climate change is no longer a future risk for pension schemes, it is a present-day financial reality. The decisions trustees, policymakers and investors make over the next decade will help determine not only the value of pension assets, but the retirement outcomes of millions of savers.
“Put simply, you can’t separate the future of pensions from the future of the economy. And you cannot separate the future of the economy from climate change. That means that climate risk is now retirement risk.”
The report calls for a more informed debate about how the UK pensions system can deliver good member outcomes in an increasingly uncertain world.