Climate change and mortality: how will members of your pension scheme be affected?
Pensions
In our previous blogs covering climate change we have covered a wide range of subjects relating to the implications of climate change on pension schemes’ investments. These topics are well documented and discussed, but we must not forget that we need to think about the risks on the liability side too. In this blog we will be looking at the impact on the mortality of UK pension scheme members in more detail.
The body of evidence signalling that climate change has an effect on future mortality rates in the UK is significant. However, there have been no studies focusing on the future mortality rates of members of defined benefit occupational pension schemes specifically. Anyone looking at climate change and the effect on pension scheme members’ mortality needs to consider both the wider evidence relating to the UK population as a whole, and whether or not this will have a similar impact on the members in question. It is also widely understood that members of UK pension schemes do not experience typical mortality rates of the wider UK population due to entrenched health inequalities in the UK. This is due to a range of factors, such as higher socioeconomic status, traditionally leading to better health outcomes for those individuals who are members of pension schemes rather than those individuals not in a pension scheme.
As part of our research we produced sensitivities to mortality assumptions in line with the Network for Greening the Financial System (NGFS) scenarios. However, we recognise that scenario testing should not be the only tool used when discussing climate change with trustees and sponsors of pension schemes. We have been keenly following the discussion around the paper ‘The Emperor’s New Climate Scenarios’ produced by the IFOA and the University of Exeter.
Which pension schemes will be affected by this?
All pension schemes, regardless of the type of scheme, need to consider the effects of climate change on their future mortality experience. There will be some (mostly DB) schemes with very low durations where, given their shorter run-off time, they will be less exposed to changing mortality trends. Our wider views on UK mortality are available in this paper we published earlier this year.
There are several factors to consider when thinking about UK mortality and climate change:
Temperature – The UK currently experiences more cold-related deaths than heat-related deaths. The majority of temperature related deaths also occur at older ages. Whilst there may be a temperature tipping point where cold-related deaths decrease to the extent that fewer people die of cold temperature related causes, we expect this effect to be short lived as temperatures rise due to climate change. The heatwaves in the UK over recent years have strengthened this argument. We expect increasing temperatures as a result of climate change to result in heavier rates of mortality for pension schemes.
Pollution – There are no age/gender specific studies connecting air pollution and mortality, but it is believed that air pollution affects those who live in urban environments, are elderly, come from deprived backgrounds and those with underlying health conditions more than others. There can also be a lag in the effect of a reduction in air pollution on mortality by up to 20 years, meaning that improvements in air quality now may still not be enough for some DB scheme members.
Weather – Studies have shown that climate change is expected to increase the incidence and impact of extreme weather events e.g. floods and storms. Data around how many deaths in the UK are specifically caused by extreme weather is difficult to analyse. However, research has been undertaken which has shown there is a link between extreme weather events and human health in the UK. Due to the relative strength of infrastructure in the UK we expect the impact of these events on the rate of mortality of members of occupational pension schemes to be limited. However, the effect of these events on members will vary depending on where these individuals live. For example, those living on the coast may have different challenges to those living in an urban environment. It is also expected that the wealthier the individual the greater their ability to adapt to the change in environment. For example, by being able to adapt their homes for extreme events and to be able to absorb price increases in food. Finally extreme weather could have the power to disrupt supply chains which may in turn have other indirect effects on mortality.
Indirect effects – There are many indirect effects of climate change upon mortality which are trickier to capture. For example, the economic impact of climate change is difficult to quantify, and the consequent impact on healthcare spending and ultimate mortality rates is harder still. However, we expect that negative economic and healthcare outcomes will accompany the lack of a transition to a more sustainable economy. It is reasonable to assume that a fall in GDP would result in lower healthcare spending. It should be noted that significant health inequity is still present in the UK and therefore we would traditionally have expected pension scheme members to be less impacted by any funding cuts than more deprived population groups. However, there is a possibility that the adverse effects of poor economic performance, linked to climate change and other factors, could have increasing impacts on higher socioeconomic groups over time. Any cut in healthcare funding would be paired with the direct health impacts of climate change, so there could be an additional interaction factor between lower health spending and poorer health.
How do we wrap up this thinking into an actuarial assumption?
We alter the long-term trend rate in the mortality assumptions in our scenario analysis so trustees and sponsors can allow for a relative change in expected future improvements. These sensitivities are then not dependent on the strength of basis used or the existing agreed long-term trend rate assumption. The long-term trend rate is the easiest parameter to adjust whilst not affecting any other elements of a scheme’s future improvements in mortality assumption.
How will this affect liabilities?
The worse the effect of climate change, the worse the rate of mortality of pension scheme members is expected to be. In a scheme funding context this theoretically translates to lower liability when looked at in isolation. However, it is important to remember that the risks of climate change must be looked at within an integrated risk management framework: including the investment, covenant and actuarial risks of climate change. Trustees and sponsors must look at the whole picture, to understand the catastrophic effects climate change will have on their pension scheme members and society in general.
Sources
Record excess deaths in UK’s heatwave summer – BBC News
Every breath we take: the lifelong impact of air pollution | RCP London
COMEAP_CV_Mechanisms_Report (publishing.service.gov.uk)
How is climate linked to extreme weather? – Met Office
the-marmot-review-10-years-on-executive-summary.pdf (instituteofhealthequity.org)
Iain McLellan
