Pension funds face significant returns drop by 2050 due to climate risk
Retirement savings could shrink by up to a third if global temperatures continue rising at current rates. That's the stark conclusion from recent analysis of pension fund performance under different climate scenarios.
Research by Ortec Finance suggests that pension portfolios may deliver returns between 10% and 30% lower by 2050 than currently expected. This projection applies if global warming reaches approximately 2.8°C by the end of the century. The research examined 180 pension funds across six major economies including the UK.
For businesses, the implications extend beyond retirement planning. Companies with workplace pension obligations, those competing for talent with pension offerings, and firms exposed to long-term investment decisions all face material financial consequences from climate-driven market shifts.
How pension portfolios respond to rising temperatures
Ortec Finance assessed pension schemes across Australia, Canada, the Netherlands, Switzerland, the United Kingdom and the United States. The analysis applied the firm's 2026 climate scenarios to evaluate how different warming pathways might affect invested assets.
Under the "Limited Action" scenario, global temperatures would climb by roughly 2.8°C by 2100. In that pathway, pension returns could fall 10% to 30% below baseline expectations by mid-century. The variation reflects differences in how funds allocate capital across geographies, sectors and asset classes.
Importantly, these figures represent potential underperformance rather than absolute losses. A fund currently expecting 5% annual returns might instead achieve 3.5% to 4.5% under this scenario. Over decades, that difference compounds significantly.
The research revealed substantial geographic variation in projected impacts. Indian pension assets showed an estimated 23% valuation decline in the Limited Action scenario. Chinese portfolios faced approximately 4% reductions. Meanwhile, UK and US funds showed roughly 1% impacts under the same conditions.
Australian, Canadian and American pension schemes appeared most exposed overall. Dutch and Swiss funds demonstrated greater resilience, partly due to differences in portfolio construction and asset allocation strategies.
Physical damage versus transition disruption
Climate-related financial risk arrives through two distinct channels. Understanding both matters for businesses managing pension obligations or long-term capital.
Physical risks stem from direct climate impacts. Extreme heat reduces worker productivity and increases cooling costs. Flooding damages property and disrupts supply chains. Wildfires destroy assets and infrastructure. Drought affects agricultural yields and water-dependent industries. These effects reduce company earnings, weaken property values and strain government finances.
Transition risks emerge from efforts to cut emissions. New regulations can obsolete existing assets. Carbon pricing changes operating costs. Technology shifts can strand infrastructure investments. Consumer preferences evolve away from high-emission products. Policy changes create winners and losers across sectors and geographies.
Critically, transition risks don't disappear by ignoring climate action. A disorderly transition creates severe short-term volatility. However, delaying action typically amplifies long-term physical damage and economic losses.
Maurits van Joolingen, managing director at Ortec Finance, noted that the climate future many scientists now consider plausible should not be treated as an extreme outlier. Instead, it represents a scenario with material consequences for sovereign debt markets, insurance systems and ultimately pension fund returns.
The analysis also highlighted amplification effects through financial systems. Rising insurance premiums reduce disposable income and property values. Insurers withdrawing coverage from high-risk areas affects mortgage availability and borrowing costs. Weaker economic growth reduces tax revenues and pressures public finances. Climate-driven supply disruptions fuel inflation, eroding real investment returns.
Deeper warming produces sharper economic contraction
Ortec modelled a more severe high-warming scenario involving approximately 3.8°C by 2100. Under that pathway, annual global economic growth could run about 1.6 percentage points lower by 2065 compared to current trajectories.
The cumulative impact would be substantial. The global economy could be roughly US$58 trillion smaller than under baseline growth assumptions. That represents permanent output lost to climate impacts, not merely delayed growth.
A separate Ortec analysis using the same climate scenarios estimated that a failed low-carbon transition could reduce worldwide pension returns by 33% by 2050 under high warming. Scenarios involving transition efforts showed smaller declines: approximately 8% under a delayed net-zero pathway and around 4% in a scenario featuring a net-zero financial crisis.
These figures illustrate a crucial point. Avoiding transition costs doesn't protect long-term investment returns. Delaying action may reduce immediate disruption but increases physical damage, economic losses and asset impairment over time.
Property, infrastructure and private equity face elevated exposure
Certain asset classes appear particularly vulnerable to climate impacts. Earlier Ortec research identified property, infrastructure debt and private equity as facing heightened risks across multiple scenarios.
Property investments have direct exposure to physical hazards including flooding, extreme heat and storm damage. Infrastructure debt links to long-lived assets with fixed locations and high replacement costs. Private equity often involves concentrated positions in sectors undergoing transition pressures or facing supply chain disruption.
These assets share common characteristics that amplify climate risk. They typically have long investment horizons, limiting flexibility to exit positions quickly. They often carry geographic concentration, creating exposure to regional climate hazards. Many depend on stable energy prices, construction costs and local economic conditions.
By contrast, liability-driven investments and certain credit assets showed greater resilience in the scenarios examined. However, this doesn't eliminate risk entirely. Climate impacts vary according to investment duration, geographic exposure, leverage levels, collateral quality and modelling assumptions.
Scenario analysis doesn't predict a single inevitable outcome. Rather, it tests how portfolios might perform under different combinations of warming, policy responses, economic growth rates and inflation patterns. Results depend heavily on assumptions about human choices yet to be made.
Compound effects over typical pension timescales
Pension funds invest across decades, making them particularly exposed to gradually developing risks. A brief market shock can be managed through diversification or rebalancing. Persistent reductions in economic growth and asset values create more serious challenges.
Lower returns directly increase the cost of providing target retirement incomes. Defined benefit schemes could face larger funding gaps, requiring higher employer contributions. Defined contribution savers might receive smaller retirement pots unless losses are offset through higher contributions or longer working lives.
For businesses operating defined benefit schemes, deteriorating funding positions trigger additional cash requirements precisely when other climate-related costs may be rising. Companies offering defined contribution pensions may face pressure to increase employer contributions to maintain competitive retirement benefits.
Trustees need to reassess strategic asset allocation in light of climate scenarios. Questions arise around climate hedging strategies, liquidity requirements and risk tolerance. Physical climate risks affect collateral values and borrower creditworthiness, influencing lending decisions and credit quality.
Higher inflation compounds these challenges. Climate-driven supply disruptions can fuel persistent price rises, weakening real returns and reducing retirees' purchasing power. Pension schemes built on assumptions of stable, moderate inflation may require significant recalibration.
Ortec argues that trustees and investment teams should prepare for a world where 2°C to 3°C warming represents a central planning assumption rather than an unlikely tail event. This reframing shifts climate risk from the edge of probability distributions to the core of strategic decision making.
Essential facts for pension trustees and business leaders
- Pension fund returns could fall 10% to 30% by 2050 under a 2.8°C warming scenario, based on analysis of 180 funds across six major economies including the UK.
- A high-warming pathway of approximately 3.8°C by 2100 could reduce global economic output by around US$58 trillion and cut pension returns by roughly 33% by mid-century.
- Geographic variation is substantial, with Indian pension assets facing estimated 23% valuation declines while UK funds show approximately 1% impacts under the same scenario.
- Property, infrastructure debt and private equity investments appear particularly vulnerable due to long time horizons and direct exposure to physical climate hazards.
- Transition risks don't disappear by delaying climate action; avoiding immediate disruption typically amplifies long-term physical damage and economic losses.
- Amplification effects through insurance markets, sovereign debt and inflation could compound direct investment losses from climate impacts.
- These estimates are scenario-based projections relative to baseline expectations, not guaranteed outcomes, and depend on future policy choices and technological development.
Integrating climate risk into pension strategy and business planning
The evidence points toward climate change as a central financial planning consideration rather than a peripheral environmental concern. Businesses need to consider multiple dimensions of exposure.
First, review pension scheme assumptions. Are climate scenarios reflected in long-term return expectations? Do asset allocation models account for geographic and sectoral climate vulnerabilities? Have stress tests incorporated both physical risks and transition pathways?
Second, assess knock-on effects for business operations. Deteriorating pension funding positions require higher cash contributions. This affects capital allocation, dividend capacity and investment flexibility. Companies competing for talent may need to adjust pension offerings as climate impacts become more visible to employees.
Third, consider supply chain and counterparty implications. If pension funds shift allocations away from high-risk sectors or geographies, businesses operating in those areas may face higher capital costs. Reduced insurance availability affects property values, borrowing terms and operational continuity.
SBS works with businesses navigating these intersections between climate risk, financial planning and operational strategy. Our compliance support services help SMEs understand reporting requirements and scenario analysis obligations as they evolve.
The choice facing pension trustees and business leaders isn't between climate action and financial prudence. The research suggests that protecting long-term investment returns increasingly requires addressing climate risks directly. An orderly transition creates near-term costs and volatility. However, delaying action appears likely to produce substantially larger economic and portfolio losses over typical pension investment horizons.
Businesses should also examine their own contributions to transition pathways. Pension fund performance depends partly on the broader economy's success in managing climate risks. Companies that reduce emissions, adapt operations and participate in transition finance potentially support both climate outcomes and long-term investment returns.
Engagement with pension trustees becomes increasingly important. Businesses can support trustees by providing clear information about climate risks in their own operations, transition plans and capital allocation strategies. This transparency helps trustees make informed decisions about investments in your sector.
Finally, consider the regulatory trajectory. As climate financial risks become better understood, reporting requirements and fiduciary duties are likely to evolve. Businesses that integrate climate considerations into pension governance now may find themselves better positioned as regulatory expectations develop. Training resources through the SBS Academy can help finance teams and trustees build necessary skills.
Where to find authoritative climate scenario resources
Several organisations provide detailed climate scenario analysis and guidance relevant to pension fund management and business planning.
The Department for Energy Security and Net Zero publishes UK climate projections, policy frameworks and transition pathway analysis. These resources help businesses understand the UK regulatory environment and government climate commitments.
The Bank of England's financial stability work includes climate stress testing for financial institutions and analysis of climate-related financial risks to the UK economy. This provides context for how regulators view pension fund exposure.
The Environment Agency offers guidance on physical climate risks including flooding, water stress and environmental hazards that affect property and infrastructure investments.
For businesses seeking to understand their own climate risks and transition planning, our net zero hub provides practical resources and support tailored to UK SMEs navigating these challenges.