How do natural disasters affect pension plans?

BC Financial Services Authority launches consultation on how natural catastrophes and climate-related events pose a risk to financial sector

How do natural disasters affect pension plans?

Beginning in March 2023 and, with increased intensity starting in June, Canada has been affected by an ongoing, record-setting series of wildfires. But how do these wildfires, and other natural catastrophes affect pension plans?

The government of Canada has released its ‘National Risk Profile’ in response to the ongoing weather events. It says the rising frequency and severity of natural disasters is a growing concern.

“In recent years, Canadians have seen extreme weather events, like floods and wildland fires, destroy homes, businesses, and critical infrastructure, and leave lasting impacts on communities right across the country,” it says in a statement. “As Canada and the world continue to experience these disasters, it is crucial to increase risk awareness across all sectors of society and to inform decision-making for reducing, preparing for, and responding to them.”

The British Columbia Financial Servies Authority (BCFSA) also wants to take a look at the risks these events pose specifically to the financial industry, including pension plans. It released a discussion paper about natural catastrophes and climate-related risks, titled ‘Natural Catastrophes and Climate-Related Risks: Managing Uncertainty and Building Resilience in the Financial Services Sector.’ With the release of the discussion paper, BCFSA also launched a consultation that will be open until November 30, 2023.

Potential impacts of natural catastrophes

“From the perspective of pension plans, the purpose of our discussion paper is to bring attention to the potential impacts of natural catastrophes and climate-related risks and to highlight our expectations set out in the draft ‘CAPSA Pension Plan Risk Management Guideline,’ in the section on Environmental, Social, Governance risks,” says Damara Kiceniuk, senior risk analyst, pensions, with BCFSA.

The paper outlines how natural catastrophes and climate-related risks pose a material risk to the financial services sector and to consumers in BC and how those risks may impact each of the segments BCFSA regulates. It discusses the complexity and uncertainty in identifying and measuring these risks, and the role of financial services providers in ensuring consumers have the information and advice required to make informed decisions.

“Our paper draws attention to natural catastrophes, including climate-related extreme weather events and earthquakes, and beyond those, risks associated with transitioning to a lower-emissions economy,” says Kiceniuk.

Expectations for plan administrators

She adds that the BSFSA’s guidance to plan administrators includes the expectation that they:

  • Identify, measure, and manage all material risks in manner that is cost effective and appropriate for the size of plan as part of an overall risk management framework;
  • Ensure that the plan governance, risk management, and investment decision-making practices are designed to identify and respond to material risks from extreme weather and earthquakes;
  • Investigate how these may amplify the other risks they currently monitor;
  • Develop a plan to understand and manage how the investment strategies for the pension fund are to respond to and address anticipated physical and transition risks; and
  • Improve their understanding of risks and opportunities and improve the data they receive to support their understanding.

“As an integrated regulator, we consider how one sector affects the others. For instance, the property disclosure requirements we are exploring could help investors, including pension funds, understand the exposure of real estate to hazards, such as flooding, earthquakes, extreme heat, and wildfires,” she says.

The BCFSA discussion paper on natural catastrophe and climate-related risks sets out topics for discussion with stakeholders and outlines its view on the role of BCFSA in addressing these risks. It also aims to start a conversation about future regulatory actions.