Could Climate Change Deplete Your Pension?


If oil, gas and coal companies were to face serious financial difficulty, the average person might anticipate the annoyance of a higher heating bill, or having to cough up more cash to fill up at the gas station.

They probably don’t think about their pension—but maybe they should.

Earlier this year, members of the British Parliament sent out a clear warning to the Bank of England and the country’s pension funds: watch out for the carbon bubble.

The “carbon bubble”? Here’s a quick explanation from the Guardian:

The idea of a carbon bubble – meaning that the true costs of carbon dioxide in intensifying climate change are not taken into account in a company’s stock market valuation – has been gaining currency in recent years, but this is the first time that MPs have addressed the question head-on.

Much of the world’s fossil fuel resource will have to be left unburned if the world is to avoid dangerous levels of global warming, the environmental audit committee warned.

To many, it probably sounds like a silly term. But its potential implications are serious enough that many in the UK are starting to worry about its effect on the global economy, and that includes pension funds—UK pension funds are particularly exposed to fossil fuel-based assets, as some estimates say 20 to 30 percent of the funds’ assets are allocated toward investments that would be seriously harmed by the burst of the “carbon bubble”.

But some experts say pension funds in the US should be worrying about this, too, because it’s a global issue. From The Ecologist:

If the impetus to prevent further climate change reaches the point where measures such as a global carbon tax are agreed, for example, then those fossil fuel reserves that have contributed to the heady share price performance of oil, gas and coal companies will become ‘unburnable’ or ‘stranded’ in the ground.

But even if we continue business as usual, value could begin to unravel.

Because to continue with business as usual would require an ever increasing amount of capital expenditure by the industry to explore territories previously off limits – the Arctic, for example and the Canadian Tar Sands – tapping these new resources, quite apart from being a bad idea environmentally, is hugely expensive.

Dividends – the payments earned by shareholders as a reward for keeping their shares, have come under increasing pressure as companies have had to spend their money on more exploratory drilling rather than rewarding shareholders.

So some shareholders are already feeling the impact and rather than see their dividends further eroded, might prefer to sell their shares in favour of a more rewarding dividend stock.

Some don’t have the stomach for all those hypotheticals. But it’s hard to deny the policy shifts in recent years leading us towards a lower-carbon world. That includes regulation in the US, Europe and China that cuts down emissions and encourages clean energy.

That trend doesn’t look to be reversing itself in the near future, and those policies are most likely to hurt the industries most reliant on fossil fuels.

There’ve been calls in the US for public pension funds to decrease their exposure to those industries. From the Financial Times:

US pension funds have ignored calls from city councils and mayors to divest from carbon-intensive companies, despite concern about the long-term viability of their business models.

At least 25 cities in the US have passed resolutions calling on pension fund boards to divest from fossil fuel holdings, according to figures from, a group that campaigns for investors to ditch their fossil fuel stocks.

Three Californian cities, Richmond, Berkeley and Oakland, urged Calpers, one of the largest US pension schemes, with $288bn of assets, and which manages their funds, to divest from fossil fuels. Calpers has ignored their request.

Calpers said: “The issue has been brought to our attention. [We] believe engagement is the best course of action.”

Pension fund experts point out that it is difficult to pull out of illiquid fossil fuel investments, or carbon intensive stocks that are undervalued, provide stable dividends or are better positioned for legislative change.

CalPERS isn’t the only fund that doesn’t want to divest. Not a single public fund has commited to divesting from carbon-reliant companies.

To some, CalPERS’ policy of “engagement” rather than divestment probably sounds like a cop-out. But some experts think the policy could be effective.

“With divestment you are not solving the problem necessarily, you are just not part of it.” Said George Serafeim, associate professor of business administration at Harvard Business School. “With engagement you are trying to solve the problem by engaging with companies to improve their energy efficiency, but you are still part of the mix.”

Photo: Paul Falardeau via Flickr CC License

Federal Government to Hone In On State and Local Pensions


The Treasury Department announced the opening today of a new office, and chief among its responsibilities will be examining state and local pensions. Though the specific mandates of the office are unclear, the State and Local Finance Office will examine the problems facing state and local pension systems and serve as a “resource for retirement planning”, according to its Director.

From Reuters:

State and Local Finance Office Director Kent Hiteshew told a meeting of the Council of State Governments that he had appointed the chief investment officer of Maryland’s pension fund as a special adviser who “will substantially strengthen our office’s understanding of the critical challenges facing a system upon which approximately 23 million Americans depend … for their retirement security.”

Saying that state and local pensions now have enough money to cover only 72 percent of their costs, in comparison to nearly 100 percent in 2000, Hiteshew added that very few pensions are well-funded.

“While the current underfunding started prior to the Great Recession, this was exacerbated by both market forces and trying fiscal times during the last few years,” he added.

Hiteshew’s office will study the state of public pensions and help retirement systems evaluate their financial conditions, and it will look into the growing costs of retiree healthcare.

Public pension systems in the US are, on average, 72 percent funded. In 2000, nearly all systems were 100 percent funded, according to Hiteshew.

Congress backtracks on military pension cuts

Just two months ago, the US Congress voted to decrease cost-of-living-adjustments for 750,000 military pensioners in an effort to save $6.3 billion over 10 years and curb ballooning military benefit expenses.

But today, lawmakers reversed course: The US Senate voted overwhelmingly to repeal the cuts, and that vote came on the heels of a similarly one-sided vote that took place in the House yesterday.

The reversal came about as a result of various political realities; many military veterans and the groups that represent them expressed outrage at the initial pension cuts, and lawmakers facing mid-term elections were sensitive to the protests. Pension cuts, especially pertaining to military personnel, are a tumultuous political undertaking regardless of upcoming elections.

But some lawmakers expressed their discontent with reversing one of the few spending cuts that have made it past Congress in recent years. Reuters reports:

Conservative Republican Senator Jeff Flake of Arizona said it was untrue that lawmakers were “turning our backs on veterans” with the cuts. He warned that the U.S. fiscal situation would only get worse if lawmakers “roll back one of the few deficit reduction measures our president and Congress have agreed to.”

“For goodness sake, when deficit reduction measures get signed into law, surely at some point we need to stand by them,” Flake said on the Senate floor. He was one of the three senators to vote against the repeal, along with Indiana Republican Dan Coats and Delaware Democrat Tom Carper.

Had the pension cuts not been repealed, military personnel under the age of 62 would have seen the COLAs on their pensions decrease by 1% below the rate of inflation.

National security insiders overwhelmingly support military pension cuts, according to poll

Reducing pension benefits is a political minefield, and that sentiment applies two-fold when the benefits in question are for military personnel.

But no one sent that memo to House Rep. Paul Ryan (R-WI) or Sen. Patty Murray (D-WA), who last month passed a bi-partisan budget that cuts the annual cost-of-living adjustment (COLA) of military pensions by 1%.

The move caused anger among veterans, but was supported by national security insiders, according to a poll conducted by the National Journal, a magazine widely read by Washington insiders.

According to the poll, 52% of insiders support the COLA decrease and 38% think the cutbacks should have been deeper.

Only 10% of insiders think military benefits should be off-limits entirely.

The Washington Post explains the rationale for cutting military pensions:

Overall, military compensation — including health benefits and salaries paid to active-duty personnel — eats up roughly half the defense budget, a proportion that is steadily rising. In a speech in November, Defense Secretary Chuck Hagel warned that “without serious attempts to achieve significant savings” in military compensation, “we risk becoming an unbalanced force.”

Military pensions would appear to be particularly ripe for reduction. Anyone who puts in 20 years can receive payments immediately and look forward to annual cost-of-living adjustments, or COLAs, for life. That means service members who signed up at 18 could find themselves with a full pension — roughly half their ­active-duty paycheck — at 38. And the government finds itself doling out cash to former troops who have launched lucrative second careers, often with defense contractors that draw their profits from government coffers.

A 1% decrease in COLAs may not sound like much, but the decrease is projected to save the federal government $6 billion over the next 10 years.

Click here to read a summary of the budget deal.