Ortec Finance, a leading provider of technology and risk management solutions for financial institutions, has found that North American pension fund returns could decline up to 50%* by 2040 under a high warming scenario if the current approach to setting and governing climate policy doesn’t change.
Returns for UK pension funds, on the other hand, are expected to be more resilient, potentially incurring declines of less than 30% by 2040 and up to 30% by 2050, while Swiss and Dutch pension funds are also comparatively less affected by rising temperatures due to their lower geographical exposure to extreme climate events and substantial allocations to less vulnerable assets.
These findings are revealed in Ortec Finance’s inaugural global pension fund climate risk report released this week, in which it analyzed the publicly available data from 150 pension funds in the US, Canada, the UK, the Netherlands and Switzerland, using Ortec Finance’s climate scenario modeling framework.
Applying seven possible climate scenarios, which include the impact of climate tipping points in its high warming scenarios, Ortec Finance’s research found significant divergence in the exposure of pension funds globally to climate change.
North American pension funds face greatest climate risk exposure: US and Canadian pension funds are expected to experience the most significant impact from both transition and physical climate risks. With heavy reliance on high-risk assets like equities and alternatives, these funds could face investment return declines of up to 50%* by 2040 if climate policies remain unaddressed, with further declines through 2050.
UK pension funds show diverse outcomes and relative resilience: While certain UK pension funds may face investment return declines exceeding 20%** from transition risks, many exhibit resilience due to their risk-averse asset allocation and comparatively less climate-vulnerable geography. Defined Benefit schemes and lower home bias also contribute to their ability to withstand both transition and physical climate risks.
Swiss and Dutch pension funds display greater stability: Pension funds in Switzerland and the Netherlands are expected to be the most resilient to disruptive climate policies, benefitting from risk-averse allocations to fixed income. These funds are less vulnerable to both transition and physical risks due to stable policy environments and lower exposure to extreme climate events.
Commenting on the results Doruk Onal, climate risk specialist at Ortec Finance, said: "Transition risks are expected to be the dominant climate risk driver compared to physical risks during the 2025–2030 period for pension funds worldwide. Additional low-carbon policies, revised NDCs (Nationally Defined Contributions), and net-zero target reviews by global investor alliance groups may accelerate the stranding of fossil fuel assets, potentially triggering market overreactions and widespread disruption.
“The decline in investment returns has serious implications. For pensioners, reduced returns could lead to lower retirement benefits and financial insecurity. Sponsors, including corporations and government bodies, might face increased contributions to cover shortfalls, impacting their financial health. Employees could also be affected by lower pension fund performance, leading to potential adjustments in retirement planning and expectations.”
*Figure derived from Ortec Finance’s High Warming Scenario Stress
**Figure derived from Ortec Finance’s Net Zero Financial Crisis Scenario Stress
For more detail and statistics, please refer to the full report: Climate risks facing the pension industry worldwide
Contact
Doruk Onal
Climate Risk Consultant