UK pension funds are expected to be more resilient against climate change than their global peers, although some UK schemes could see their investment return declines exceeding 20 per cent from transition risks, analysis from Ortec Finance has revealed.

The research, which covered more than 140 pension funds in the US, Canada, the UK, the Netherlands and Switzerland, revealed a "significant divergence" in the exposure of pension funds globally to climate change, across seven possible climate scenarios modelled.

In particular, the analysis showed that North American pension fund returns could decline up to 50 per cent by 2040 under a high warming scenario if the current approach to setting and governing climate policy doesn’t change.

In comparison, UK pension funds are set to incur declines of less than 30 per cent by 2040 and up to 30 per cent by 2050.

Indeed, Ortec Finance suggested that many UK pension schemes exhibit resilience due to their risk-averse asset allocation and comparatively less climate-vulnerable geography.

In particular, the group said that defined benefit (DB) schemes and lower home bias also contribute to UK pension funds' ability to withstand both transition and physical climate risks.

However, the UK pension system exhibited the most variable transition risk sensitivity in the near term, with both the most resilient and least resilient pension funds in the study.

The UK was not the only country with higher resilience, as Swiss and Dutch pension funds were also comparatively less affected by rising temperatures due to their lower geographical exposure to extreme climate events and substantial allocations to less vulnerable assets.

According to the report, 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.

Ortec said that these funds are also less vulnerable to both transition and physical risks due to stable policy environments and lower exposure to extreme climate events.

However, Ortec Finance climate risk specialist, Doruk Onal, noted that, despite the geographical differences, transition risks are expected to be the dominant climate risk driver compared to physical risks during the 2025–2030 period for pension funds worldwide.

Onal stated: "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.”

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