Study: DB Pensions Face Dismal Fate With Actuarial Negligence

Actuaries charged with risk management in the financial sector have ignored the biggest risks facing defined benefit pensions, and it could be too late, one report asserts.

(February 4, 2013) — The pension industry is under intense pressure due to ignorance among actuaries in their assessment of climate change and resource scarcity, according to a report.

The research published by the Global Sustainability Institute at Anglia Ruskin University shows that actuaries have turned a blind eye to assessing such risk factors, questioning whether it’s too late. More specifically, according to the report, global warming and its associated challenges could wipe out the entire defined benefits pension industry within three decades if the industry doesn’t rapidly change course.

The report concludes: “Currently actuarial models are effectively discounting to zero the probability of economic growth being limited by resource constraints. If resource constraints are significant, this means that current models will persistently understate the value of liabilities.”

Furthermore, the research notes that if economic growth is limited by resource constraints, this could be reasonably expected to significantly affect future financial and demographic outcomes. “If these future outcomes are indeed affected, then the assumptions that actuaries use should take into account these future developments” the research asserts.

“Were the global economy to go into long-term decline, the legal basis on which financial products sit could conceivably be undermined, and the sponsor employer may no longer exist to pay contributions,” the study continues. “The financial markets may also cease to exist, at least in their current form, and hence the projection would become meaningless.”

Research by consulting firm Mercer has exposed some of these risks posed by climate change and related factors. In February 2011, the firm noted that climate change could contribute as much as 10% to portfolio risk over the next 20 years. “Climate change brings fundamental implications for investment patterns, risks and rewards,” Andrew Kirton, chief investment officer at Mercer, commented in a statement at the time. “Institutional investors should be factoring long-term considerations, such as climate change, into their strategic planning.”

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