With Canadian pension funds due to see their financial returns fall up to 50 of 60% by 2040 if average global warming reaches 3.7C, the office that who oversees the financial health of the country's biggest pension plan has received a stern warning that it severely underestimates the "systemic financial risk" of climate change.
The Office of the Chief Actuary (OCA), led by Chief Actuary Assia Billig, "is failing to assess the cascading economic and financial impacts of a rapidly warming world," writes Shift: Action for Pension Wealth and Planet Health, represented by environmental law charity Ecojustice, in a release this morning. "This could have potentially severe consequences for the Canada Pension Plan (CPP) and the Public Sector Pension Plan (PSPP), which collectively have more than $1 trillion in retirement savings under management on behalf of millions of Canadians."
CPP is responsible for safeguarding the retirement savings of 22 million Canadians, while PSPP has another 90,000 members.
"Many of Canada's largest pensions are sleepwalking into a climate crisis with existential consequences for their members," Shift Executive Director Adam Scott said in the release. "The Chief Actuary needs to do its job by ensuring its statutory actuarial valuations of federal plans and programs actually reflect the reality of these risks, so that they can be managed before it's too late."
In a 10-page response to OCA's triennial review of the CPP, Shift warns Billig that she is dramatically underestimating the financial impact of a worst-case climate scenario: her latest analysis calculates [pdf] GDP declines of 8% by 2050 and 30% by 2100 in a "failed transition", when climate scientists put those losses as high as 73% with a 4C average temperature rises.
"While the OCA describes the CPP and PSPP climate analysis as downside risk assessments, the GDP impacts relied upon appear to be substantially less severe than would be expected according to the most recent, authoritative climate science and risk modelling," the letter states.
Latest assessments of countries' emission reduction commitments under the Paris climate accord project average warming of about 2.7C-if they all keep their promises.
OCA's methodology also ignores climate "tipping points" like ice sheet collapse and permafrost melt that "could trigger runaway warming and massive economic disruption," and "become increasingly likely if global temperature increases exceed 1.5C above pre-industrial levels," the media release states. And it fails to assess risky investments in fossil fuel companies that totalled $22 billion for CPP as of last October, and between $6.2 and $8.1 billion for PSPP as of March 31, 2024.
"By directly contributing to the accumulation of greenhouse gases in the atmosphere, [CPP]'s fossil fuel investments facilitate rising physical risks across the portfolio," Shift's letter to Billig warns. The plan's fossil investments "are also exposed to the transition risk of asset stranding, devaluation, and sudden re-pricing if, for example, fossil fuel development is limited." and Risk assessments to date also leave policy-makers, investors, and corporate executives "flying blind" on the mounting liability risk that fossil investors face, the letter says.
Young Canadians just entering the work force "face a double threat," the Shift-Ecojustice release warns. "They have decades of pension contributions ahead during a period of escalating climate instability, and they won't be eligible to draw their pension benefits until well after 2050, when climate impacts are expected to be most severe."
To address those risks, the two organizations call on OCA to:
Build realistic climate tipping points and cascading impacts into its risk assessments;
Reassess economic models its to stop underestimating worst-case climate scenarios;
More clearly quantify climate uncertainties and risks;
Pay closer attention to risks from fossil fuel investments;
Integrate climate impacts into baseline financial projections.
Source: The Energy Mix
