In focus

The impact on UK pension funds of climate change

The Department of Work and Pensions (DWP) in the UK is consulting on improving the governance, strategy and reporting of occupational pension schemes on the impact of climate change.

But what impact might allowing for climate change in the strategy for a Defined Benefit (DB) pension scheme have?

Schroders was one of the first asset managers to publish long-term capital market assumptions taking into account climate change, so we are in a good position to be able to investigate not only the resulting impact on funding level but also the actions that Trustees may take to improve their results.

In this paper, we discuss the impact climate change could have on pension scheme funding levels. The ability to model this impact is essential in informing Trustee decision making. Overall, we found that both our two climate change scenarios, had a negative impact when projecting a typical UK DB pension scheme’s funding level into the future. The level of impact was dependent on the scheme’s current strategy. However, should a scheme choose to be more climate conscious, it may be able to manage the impact climate change has on returns – we discuss how later in this paper.

Our key findings are:

  • Climate change will impact asset classes with differing magnitudes and therefore the scheme’s asset allocation and liability duration are important factors in determining the impact on funding level projections.
  • Perhaps surprisingly, UK DB schemes that have higher allocations to UK equities (and indeed developed market equities) relative to other global equities are likely to become fully funded more quickly than those that do not, although not by a significant margin.
  • Trustees are being asked to ‘undertake scenario analysis in at least two scenarios’. We found that over a 30-year time horizon, the implications for funding were marginal between the two scenarios modelled. However, over a 100-year time horizon (which is likely to be longer than most closed DB schemes’ time horizons), this difference would be more marked.
  • Trustees must have a framework for assessing the impact on both their pension scheme’s assets and liabilities; we have suggested a move from traditional objectives to ‘climate conscious objectives’. The results shown here are somewhat marginal but Trustees will of course need to be satisfied that they understand the potential impact on their own scheme.
  • Given the long-term and dynamic nature of climate change, the agreed framework should be applied consistently and updated on a regular basis to allow Trustees to assess the potential effects of climate change.

Find out more in our full paper below.



Read the full report

The impact on UK pension funds of climate change 9 pages | 652 kb