You probably know the story of the frog being cooked alive in a pot of water but not realising it, because the heat is being turned up so gradually. When it comes to climate change, we are seeing more about it in the news – but are we really doing enough to stop it? Or, like the frog, are we doing nothing to turn down the heat, not knowing our fate?
Pension actuaries may not believe they have the power to help or to raise awareness of Resource and Environment (R&E) issues, or make their industry more green. But a recent paper from the Institute and Faculty of Actuaries on this subject is a first attempt to show they hold some sway.
The paper states R&E issues are unlikely to be the top issue for actuaries, but they should be considered when looking at Integrated Risk Management. Effects on funding assumptions, covenant strength, and investment returns all need to be considered.
Financial and mortality assumptions are likely to be affected by R&E issues, but not visibly demonstrated until the long term. The Institute is commissioning some scenario analysis to help actuaries, trustees and companies to understand the potential impact of these issues on investment returns, market yields and inflation expectations, and hence on pension scheme funding.
Mortality rates may either improve or decline due climate change – a reduction in cold-related deaths during winter may be offset by an increase in heat-related deaths, or deaths due to extreme weather events. It’s also plausible that attempts to mitigate climate change lead to an increase in mortality rates, with green-focused governments precipitating a resource-constrained economy, or increases in food prices leading to poorer nutrition and less spent on healthcare.
Covenant strength is crucial when considering funding strategies for schemes, but R&E issues are difficult to quantify, so they may not be reflected adequately in covenant assessments. When assessing the covenant of a sponsor, trustees should ask the advisor to include R&E issues. By looking at how various areas of the business could be affected, it may indicate how vulnerable a sponsor is to sustaining a business in line with international targets, such as keeping global average temperature rises below 2˚C.
Our View: With enough careful observation and persistent efforts at prevention, actuaries can help to curtail climate change or at least slow it considerably until a long-term solution is established. After all, a watched pot never boils…