Climate risk could add £25bn to FTSE 350 DB scheme deficits

Climate risk could add £25bn to FTSE 350 companies’ defined benefit (DB) pension scheme deficits over the next 15 years, according to research from Hymans Robertson.

The consultancy’s annual FTSE 350 analysis calculated the potential additional liability from climate risk through the impact of three scenarios on the one-in-20 downside risk being run by the FTSE 350 over time.

It found that a ‘smooth transition’ added the most deficit over the short term at £20bn in three years, with the increase being driven by the “rapid and aggressive” policy changes that would be required, harming DB funding in the short term.

However, over the longer term a ‘no transition’ scenario would present DB funding with more risk, potentially increasing the deficit by £25bn in 15 years’ time.

‘Delayed transition’ was found to add the lowest level of additional deficit risk as the scenario never added more than £10bn relative to the baseline position over a 15-year period.

Hymans Robertson head of corporate DB, Alistair Russell-Smith, stated that it was becoming ever-more important for sponsors and trustees to understand the impact of climate risk on DB funding strategies.

“It is clear from our analysis that the impact of climate risk on FTSE 350 pension deficits is significant – as much as £25bn of additional deficit risk,” he continued.

“Covenants can also be significantly impacted by climate risk, potentially leading to scenarios where additional cash is needed to fund DB deficits at just the time covenant strength is falling.

“While corporates already report and manage some of the ‘externality’ risks associated with their operations, many have also already embraced the Taskforce for Climate-related Financial Disclosures (TCFD).

“These TCFD requirements are being rolled out to pension schemes, initially those over £5bn and subsequently to those over £1bn, obligating them to manage and report on climate-related risks specifically.”

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