Will Climate Change ‘Wipe Out’ Your Pension?

By Jonathan Marshall

Anyone who pays attention to the science knows that climate change and other environmental stresses risk damaging many of the Earth’s ecosystems. Now a new financial study says they also might “wipe out” something else near and dear to us: retirement pensions.

The report by the Global Sustainability Institute at Anglia Ruskin University, commissioned by the Institute and Faculty of Actuaries in Great Britain, warns that global resource constraints will increase energy and commodity prices in coming decades and could “trigger a long term decline in the global economy and civil unrest.”

As just one example, the report points to the possible impact of growing population, desertification, salination, soil erosion, and more extreme weather on future farm productivity and food prices.

A ‘question of viability’

The findings will profoundly interest actuaries who make long-term assumptions about economic growth to model the adequacy of, and risks to, institutional and national retirement programs. More important, they should profoundly interest all the rest of us who are counting on those programs, ranging from our 401(k)s to Social Security.

“If future economic growth is limited by resource constraints, or realistically by other factors such as debt overhang or reduced productivity, this puts into question the viability of current savings vehicles’ structure, regulation and even purpose,” the report warns.

The authors insist that their aim is “not to declare that we are all ‘doomed.’”  But if governments and the private sector fail to take collective action, looming environmental and resource challenges could impoverish us terribly:

Were the global economy to go into long term decline the legal basis on which financial products sit could conceivably be undermined, and the sponsor employer may no longer exist to pay contributions, the financial markets may also cease to exist, at least in their current form . . . The more extreme scenarios modeled represent financial disaster; the assets of pension schemes will effectively be wiped out and pensions will be reduced to negligible levels.

Most funds fail to understand the risks

Similar warnings date back to Thomas Malthus at the turn of the 19th century and were famously revived by the Club of Rome’s “Limits to Growth” report in the 1970s. So far they have failed to prove out.  But it’s hard to argue with this new report’s conclusion that “[ignoring] the probability of economic growth being limited by resource constraints,” as most current actuarial models do, seriously understates the potential risks.

Last month, the Asset Owners Disclosure Project issued a global ranking of major pension funds and other large investors based on their management of climate risk. Most funds have little or no appreciation of those risks, the organization concluded.

However, other organizations like Ceres are working hard with major investors, companies, and public interest groups to promote sustainability leadership and “improve corporate strategies and public policies on climate change and other environmental and social challenges across the global economy.” PG&E, which has a long history of environmental leadership, was the first California utility selected to join Ceres.

Email Jonathan Marshall at jonathan.marshall@pge.com.

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