The 2009 Copenhagen Climate Summit has been described as the most important environmental summit in history. Unless the delegates from 192 countries can reach an agreement to cut carbon emissions within the next decade, the UK Met Office (UKMO) predicts that global temperatures will rise by at least 2 degrees Celsius. This will inevitably have a dramatic effect on world poverty, healthcare and mortality.
In the pensions world there has been much debate as to the impact of climate change on pension scheme assets, with many schemes making climate change a key issue for their investment managers. But what about the liability side of pension schemes? As negotiations at the Summit were suspended after the African group withdrew co-operation, Punter Southall asks what impact climate change will have on effect on pensioner life expectancy and thus the liabilities of UK pension schemes.
Fewer Winter Deaths?
The Stern Report, published in October 2006 and lead by Lord Stern, was one of the most comprehensive reviews ever carried out on the economics of climate change and claimed that the UK will experience some “net benefit from moderate levels of warming”. It predicted that climate change and the resulting warmer winters will reduce mortality rates experienced here during the winter months, more than offsetting any increase in deaths from rising temperatures in the summer months.
Each winter thousands more pensioners die compared to during the summer months, with last winter (2008/09) seeing an estimated 36,700 "excess winter deaths" in England and Wales. This was the highest level since 1999/2000 and was an increase of 49 per cent compared with the figure for 2007/08.
The Met Office certainly seem to be concerned with excess winter deaths and have said this week that they will be contacting thousands of elderly pensioners (especially those with lung disease) to warn them of a big Christmas chill. However, by analysing average winter temperatures and excess winter deaths since 1965, Punter Southall have concluded that only 20% of the variation in excess winter deaths is explained by changes in average winter temperatures.
So why then do we experience a greater level of mortality in the winter time compared to during the summer? Well, our analysis has revealed that rather than winter temperature or even heating prices, the main contributing factor seems to be levels of influenza (which are more prevalent during winter). Influenza accounts for 2-3 times more deaths than any other disease in the Office for National Statistics' "Excess Winter Mortality Index". And the relationship between global warming and influenza is certainly much less clear cut.
So what impact on pension scheme liabilities?
If no agreement is reached at the Copenhagen Climate Summit this week it is more than likely that global temperatures will continue to rise, as will the UK average winter temperature. Given current levels, a 2 degrees rise in winter temperature is likely to result in a reduction of 30% in excess winter deaths based on the historic correlations between winter temperatures and excess winter deaths.
However, dramatic as this may sound, Richard Jones, Principal at Punter Southall , calculates that this is only equivalent to reducing the population's total number of deaths by about 2% and will only cause current pensioner life expectancy to rise by about 0.1 years.
"This is pretty inconsequential given that current life expectancy has been rising by, on average, about a quarter of a year each year in recent times anyway due to improvements in lifestyle and medical advances. And so the impact on pension scheme liabilities of falling excess winter deaths?...... pretty trivial!"
So in summary, while global warming is likely to have an enormous impact on mortality rates in much of the world, UK pension schemes seem safe for now.
Ends
For media information related to Punter Southall, please contact:
Penrose Financial
Gay Collins/André Flemmings/ Clare Murphy-McGreevey
020 7786 4882/4811/4834
Trustee training - Pension scheme investment (September 2010)
