GAO Says US Gov’t Retirement Plan Vulnerable to Climate Risk

The US Government Accountability Office (GAO) is calling for the Federal Retirement Thrift Investment Board (FRTIB) to evaluate the investment offerings in the Thrift Savings Plan (TSP) to assess its exposure to climate change risk.

The Federal Retirement Thrift Investment Board administers the Thrift Savings Plan, which is a defined contribution (DC) plan for US civil service employees and retirees and for members of the uniformed services.

The GAO’s recommendation came in the form of a 50-page report examining retirement plans’ exposure to climate change-related investment risks, what retirement plans in other countries have done to address those risks, and how they communicate this information to the public. It also looked at what steps the FRTIB has taken to address investment risks from climate change.

The GAO said it reviewed relevant literature and interviewed representatives from investment consulting firms and other stakeholders who are knowledgeable about climate change and its potential financial impacts. It also said it looked at documents and interviewed officials from retirement plans for public- and private-sector employees in the UK, Japan, and Sweden that are examples of plans addressing climate risks. The GAO also reviewed Federal Retirement Thrift Investment Board documents and interviewed board officials.

The report found that while some retirement plans in other countries have assessed climate change-related risks and taken steps to address and disclose them, the Federal Retirement Thrift Investment Board hasn’t, which it said has left participants in the Thrift Savings Plan potentially vulnerable.

The GAO said the FRTIB did not indicate whether it agreed or disagreed with the recommendation to evaluate the plan for climate change risk and stated that it subscribes to a strict indexing discipline and efficient market theory. Board officials told the GAO that they use a passive investment strategy and do not focus on risks to a specific industry or company. The report noted that while the Federal Retirement Thrift Investment Board is required by law to invest the plan’s funds passively, it has identified and addressed investment risks in the past.

For example, it said that in the 1990s, the FRTIB reviewed its investment policies and recommended adding an international equities fund and a small- and medium-capitalization stock fund, both passively managed, to incorporate classes of assets that it determined were missing from the Thrift Savings Plan’s investment mix. The report also said that financial sector stakeholders, including an advisory panel to a federal financial regulator, have noted the importance of considering the investment risks from climate change.

“Evaluating such risks is also consistent with GAO’s Disaster Resilience Framework,” the report said. “Taking action to understand the financial risks that climate change poses to the TSP would enhance FRTIB’s risk management and help it protect the retirement savings of federal workers.”