Why the Pension Schemes Bill must tackle climate risk to protect UK savers

The UK’s pension system, with around £3trn in asset, is undergoing its most sweeping reform in two decades. The 2025 Pensions Schemes Bill, a cornerstone of this overhaul, aims to unlock investment in UK infrastructure and consolidate smaller schemes into large-scale “megafunds.” This could help to make the system more effective in supporting national productivity. Yet, amidst these ambitions, the Bill misses a fundamental threat to the long-term security of pension savers: climate change.

The International Energy Agency has been clear— there is no room for expanded fossil fuel production if we are to remain within safe climate boundaries. Despite this, UK pension schemes continue to channel billions into coal, oil, and gas companies, including those aggressively pursuing new extraction projects. This status quo exposes retirees to enormous financial risks from stranded assets and threatens the UK economy's long-term resilience.

Climate-related financial risk is no longer theoretical. A recent analysis by the Institute and Faculty of Actuaries warns that current climate policy pathways are steering us toward 3°C of warming—a scenario that could halve the global economy. For pension portfolios, the implications are stark. Studies suggest UK schemes could see 20–30% declines in valuation by 2040 under plausible warming scenarios. Particularly at risk are holdings in fossil fuel companies, which face growing regulatory, reputational, and market pressures.

The systemic nature of these risks demands more than incremental reform or voluntary disclosure. Trustees across the sector are grappling with uncertainty about how to integrate climate risk into fiduciary duties. The result has been patchy and inconsistent responses: more than 85% of leading UK pension schemes still lack credible climate action plans. Disclosure regimes, while valuable, have failed to prevent continued investment in high-risk fossil fuel assets. Voluntary action, in short, has hit its ceiling.

That’s why an amendment to the Pension Schemes Bill is urgently needed. It should do two things. First, it should require pension funds to exclude companies with significant exposure to thermal coal—the dirtiest, most polluting fossil fuel—from their investment portfolios. Many funds have already taken this step voluntarily, and the UK has removed coal from domestic power generation. Putting this on a statutory footing ensures all schemes meet a minimum standard and helps prevent laggards from undermining progress.

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Second, the amendment should establish a review mechanism to consider future restrictions on fossil fuel investments—particularly those involved in exploration or expansion. This gradual, evidence-based approach would offer a practical pathway to manage systemic risk without imposing abrupt, disruptive shifts on investment strategies.

This would be a world-first: legislation that directly addresses climate risk in pension investments. It would send a strong signal to markets, encourage responsible investment, and—critically—protect savers. Aligning the UK pension system with national climate goals and global best practice is not just an environmental imperative; it is a financial necessity.

Some may argue that climate concerns are already on the radar of trustees. But without statutory backing, progress remains uneven, undermining both risk management and market integrity. The amendment would create a level playing field, giving all schemes the clarity and certainty needed to adapt.

We are at a crossroads. The pension reforms currently underway present a once-in-a-generation opportunity to align financial systems with a sustainable future. If we fail to act now, we are not only failing the planet—we are failing every saver who expects their pension to provide security, not exposure to existential risk.

The Pension Schemes Bill needs amendment—to protect both our climate and our collective financial future.

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