Source: https://unsplash.com/photos/g0b_tx3i0_8. This image is from Unsplash and was published prior to 5 June 2017 under the Creative Commons CC0 1.0 Universal Public Domain Dedication

Catch 22 can in no way be compared to actuarial practice. One puts its characters in impossible positions, with constantly shifting targets, rewards often inversely proportional to the social usefulness of the characters’ actions and against a backdrop inordinately preoccupied with death. The other has recently been on our TV screens directed by George Clooney.

The most recent link between the two was provided by John Taylor’s excellent Institute and Faculty of Actuaries (IFoA) presidential address last month. He encouraged us all to look at Jimmy Reid’s 1972 speech at Glasgow University (an extract showing the passion with which it was delivered can be seen here). So I did. John picked out the following passage:

I am convinced that the great mass of our people go through life without even a glimmer of what they could have contributed to their fellow human beings. This is a personal tragedy. It’s a social crime. The flowering of each individual’s personality and talents is the precondition for everyone’s development.

Inspiring as that is, my eye was drawn to a different passage of Jimmy Reid’s speech:

Society and its prevailing sense of values leads to another form of alienation. It alienates some from humanity. It partially dehumanises some people, makes them insensitive, ruthless in their handling of fellow human beings, self-centred and grasping. The irony is, they are often considered normal and well adjusted. It is my sincere contention that anyone who can be totally adjusted to our society is in greater need of psychiatric analysis and treatment than anyone else.

They remind me of the character in the novel, Catch 22, the father of Major Major. He was a farmer in the American Mid West. He hated suggestions for things like Medicare, social services, unemployment benefits or civil rights. He was, however, an enthusiast for the agricultural policies that paid farmers for not bringing their fields under cultivation. From the money he got for not growing alfalfa he bought more land in order not to grow alfalfa. He became rich. Pilgrims came from all over the state to sit at his feet and learn how to be a successful non-grower of alfalfa. His philosophy was simple. The poor didn’t work hard enough and so they were poor. He believed that the good Lord gave him two strong hands to grab as much as he could for himself. He is a comic figure. But think, have you not met his like here in Britain? Here in Scotland? I have.

This got me thinking about the investment requirements of the Green New Deal, as this would need to be a huge programme of work to transform our infrastructure and economy away from the carbon-burning planet-trashing Doomsday machine it currently is, which in turn would need huge levels of investment.

I have previously written about some of the views about how we might reduce our current reliance on carbon: the one with the most coherence in my view being the Green New Deal.

However there is a problem. Since our current system, the one which needs to be transformed, is currently predominantly doing the financial sector’s equivalent of rewarding people for not growing alfalfa (for example the misallocation costs estimated by SPERI at £2.7 trillion between 1995 and 2015 from having too large a financial sector here), any Green New Deal spending, at least to start with, is going to have to come from the Government.

The authors of the latest report from the New Economics Foundation anticipate that the massive increase in public spending required to make it happen would be between £20 billion and £40 billion a year. This level of public spending is inconsistent with our current ways of measuring fiscal space, or the room for additional Government spending. Government borrowing is normally expressed in terms of a percentage of GDP and has historically been around 1.3% pa in normal times (ie other than wartime or bailing out the banks). They therefore suggest:

  • The development of a new framework, defined in terms of the threshold beyond which there is a significant risk of adverse economic effects. This would have prevented the damaging austerity policies since 2010, for instance.
  • The parallel development of a tool which would allow policymakers to accurately assess the implications of holding back fiscal space compared with the implications of borrowing for investment, and therefore allow politicians to come to an informed view on the best combination of fiscal intervention or fiscal prudence at a given point in time, including with respect to climate related risks.
  • More explicit cooperation between the Bank of England and the Treasury, including the use of a new public investment bank (or network of banks) such as a green national investment bank (GNIB) – to increase commercial lending to green industries.

A particular interesting aspect of the GNIB is the proposal to make it independent of political interference. In the same way as those economists who argue for independent central banks so that governments don’t pursue damaging monetary policy in particular for electoral gain, some advocates of the GNIB believe it could be used as a backstop against governments underusing fiscal space for ideological reasons.

Richard Murphy points out that https://www.gov.uk/government/statistics/individual-savings-account-statistics shows £40 billion was saved in cash ISAs in 2017 / 18, and suggests that Green ISAs, backed by a Green Investment Bank and paying, say, 3% a year would be more attractive than current cash ISAs, therefore potentially meeting the GND funding requirements on their own.

Simon Wren Lewis, in his discussion of the many of the arguments around the Green New Deal and how it should be funded, makes the following excellent point (amongst many others):

No one in a 100 years time who suffers the catastrophic and (for them) irreversible impact of climate change is going to console themselves that at least they did not increase the national debt. Humanity will not come to an end if we double debt to GDP ratios, but it could come to an end if we fail to combat climate change.

The Catch 22 of the title originally described the catch which kept pilots flying highly dangerous missions in World War 2 – they could only get out of them by being certified insane, but the very fact of trying to get out of them showed that they were in fact sane and therefore they had to keep flying. If we want far fewer actuaries to be employed in not growing alfalfa in the future and far more working on making the finance structures of our economy work better, whether to support a Green New Deal or more generally, we first need to embrace the idea that our current economic priorities are indeed insane.

 

On 23 March 2018, Universities UK (UUK), the universities’ employer body, issued an offer to the University and College Union (UCU) to end the Universities Superannuation Scheme (USS) pensions dispute. The UCU agreed to put it to their members and, on 13 April, announced that the proposals had been accepted by a margin of around 2 to 1. The main proposals, as summarised by Sally Hunt the UCU general secretary, revolved around the setting up of a Joint Expert Panel (JEP).

The JEP’s members were proposed by UUK and UCU – Ronnie Bowie, Sally Bridgeland and Chris Curry were proposed by UUK (two actuaries and the Director of the Pensions Policy Institute respectively). UCU proposed Saul Jacka (professor of statistics at the University of Warwick and a Turing fellow at the Alan Turing Institute), Deborah Mabbett  (professor of public policy at Birkbeck) and Catherine Donnelly (associate professor at Heriot-Watt University, where she heads up a unit focusing on pensions, investment and insurance research). The Chair is Joanne Segars, a well respected and very experienced former CEO of the Pensions and Lifetime Savings Association (PLSA) who had most recently been working with the Local Government Pension Scheme.

The Terms of Reference of the JEP were also published, which stated that the purpose of the panel was to:

  • make an assessment of the 2017 valuation;
  • focus in particular on reviewing the basis of the scheme valuation, assumptions and associated tests; and
  • agree key principles to underpin the future joint approach of UUK and UCU to the valuation of the USS fund.

They also stated that the panel would take into account:

  • the unique nature of the HE sector, intergenerational fairness and equality considerations;
  • the clear wish of staff to have a guaranteed pension comparable with current provision whilst meeting the affordability challenges for all parties; and
  • the current regulatory framework.

All of the bits relating to the 2017 valuation were reported on in September 2018, with recommendations from the JEP on ways of bringing the total contribution rate below 30% of pensionable pay.

In response to this, the USS Trustee made a proposal for concluding the 2017 valuation and preparing a 2018 valuation which could more fully take account of the JEP recommendations. This was accepted by UUK after a reduction in deficit reduction contributions from 6% to 5% was made and finally by the Pensions Regulator here, which noted that the proposal for the 2017 valuation is at the very limit of what TPR finds acceptable as it would see the Scheme carry higher levels of risk than we would consider manageable for a ‘tending to strong’ covenant.

The 2018 valuation process has been proceeding at pace, with the USS Trustee proposal following the consultation response from UUK of 3 options for future contribution patterns leading to indicative agreement from UUK for the third option of a total contribution rate of 30.7% from October 2019 and a further valuation in 2020. Following the September 2018 report, the JEP is working on a follow up report for September 2019 in relation to the USS valuation process in general. The second phase of work on the USS valuation has two parts; the first is concerned with the valuation process and governance, the second with the long-term sustainability of the scheme.

UCU have rejected all 3 options and set out a timetable for ballots on industrial action from 9 September in the event of any agreement which does not represent no detriment to members, ie no reduction in benefits or increase in employee contributions from the 8% level they were at before 1 April 2019. The JEP have suggested (while accepting that their numbers are indicative only, without detailed modelling) that, if all the measures they propose were adopted, the contribution rate could be reduced to 29.2%, split 20.1% employer and 9.1% employee in accordance with the cost sharing agreement. This compares with the USS Option 3 proposal of a split of 21.1% employer and 9.6% employee.

The UCU position looks a long way from the one that the Trustee and UUK appear to be edging towards, and I fear that a strike ballot may therefore be inevitable.

However, I think there is an equally important area mentioned in the JEP report where USS can radically improve how its members engage with a scheme which will be, for most, their major source of income in retirement.

How USS engages with its members

In their report the JEP, rightly I think, devoted several pages to member involvement in the valuation process, information and transparency and building trust and confidence, matters which will be a particular focus of their second report. They observed that:

  • longer consultation periods, initiated at an earlier stage, could facilitate member involvement via universities’ internal processes, which might help to build confidence in the valuation and a shared sense of ownership – helping to avoid future, damaging, industrial disputes.
  • there is no formal, scheme-wide mechanism for involving members in the valuation process or for assessing their appetite for changes to the Scheme
  • for future valuation cycles it will be important that the Trustee and Scheme Actuary interact more, at an earlier stage, with all stakeholders, particularly with regard to setting valuation assumptions and expectations
  • lack of understanding is likely to have contributed to falling levels of member confidence in the Scheme. It might be helpful for the Scheme to provide simple-to-understand guides which use clearly defined terminology to aid the understanding of the majority of Scheme members
  • the lack of trust in the valuation process and the Scheme has given rise to a view, albeit not a universal one, that USS is not being as open as it could be with stakeholders….whilst observing the need for confidentiality…the Panel suggests the Trustee may wish to consider how to share more of the information currently deemed confidential, eg on a redacted basis or in a summarised form. This would aid understanding of the valuation process…and, importantly, help rebuild confidence in the Scheme and its governance.

I would take such suggestions a step further, as I believe much of this communication would be wasted within the current adversarial environment, and indeed would be likely to be “spun” by one side or the other. It is clear that there is little trust in the USS Trustee on the part of the UCU officers. However, the ability of the 21,685 (out of 24,707 total votes) who voted to strike and then the 21,683 (out of 33,973 total votes) who voted to end the strike to determine what could or could not happen to a scheme with 396,278 members (as at  31 March 2017, 190,546 of them active) was, I think, unhelpful to the process of achieving a consensus more generally. Engagement needs to go much further than negotiations between UUK and UCU during valuation processes. USS does need to do far far more, in conjunction with the UCU and others, to engage members to help them understand their finances first before launching into what can be fairly abstract pensions discussions even for university professors.

The good news is that the membership have become much more aware of their pension scheme, mainly as a result of last year’s industrial action, and, being the inquisitive people they are, will I am sure now be looking for a higher degree of information (and education) from their pension provider about their benefit provision in future.

As the Pensions Policy Institute and many others have been saying for years, the decisions we are asking people to make are complex and subject to many different influences and biases. These decisions can be helped enormously if more care is taken in the nature and timing of how members are communicated with. Members will not value benefits they don’t understand and ultimately this scheme is only going to work in the long term if the people in it are trusted to be part of the decisions about its future.

The War Room with the Big Board from Stanley Kubrick’s 1964 film, ”Dr. Strangelove”. Source: ”Dr. Strangelove” trailer from 40th Anniversary Special Edition DVD, 2004 Directed by Stanley Kubrick

In 1960, Herman Kahn, a military strategist at the RAND Corporation, an influential think tank which continues to this day, wrote a book called On Thermonuclear War. It focused on the strategy of nuclear war and its effect on the international balance of power. Kahn introduced the Doomsday Machine (which Kubrick used in his film “Dr Strangelove” alongside many other references from the book) as a rhetorical device to show the limits of John von Neumann’s strategy of mutual assured destruction or MAD. It was particularly noteworthy for its views on how a country could “win” a nuclear war.

For some reason Kahn came to mind as I was looking through Resource and Environment Issues: A Practical Guide for Pensions Actuaries, from the Institute and Faculty of Actuaries’ Relevance of Resource and Environment Issues to Pension Actuaries working party, which summarises the latest thinking on the climate change-related issues scheme actuaries should be taking into consideration in their work. I will come back to why.

The section which particularly caught my attention was called How might pensions actuaries reflect R&E issues in financial assumptions? This section introduces two studies in particular. First, we have the University of Cambridge Sustainability Leadership (CISL) report on Unhedgeable risk: How climate change sentiment impacts investment. This posits three “sentiment” scenarios (paraphrased slightly for brevity – see the report for details of the models used):

  • Two degrees. This is defined as being similar to RCP2.6 and SSP1 from the Intergovernmental Panel on Climate Change (IPCC) AR5. Resource intensity and dependence on fossil fuels are markedly reduced. There is rapid technological development, reduction of inequality both globally and within countries, and a high level of awareness regarding environmental degradation. It is believed that under this scenario global warming will not raise the average temperature by more than 2°C above pre-industrial temperatures.
  • Baseline. This is a world where past trends continue (i.e. the business-as-usual scenario), and there is no significant change in the willingness of governments to step up actions on climate change. However, the worst fears of climate change are also not expected to materialise and temperatures in 2100 are only expected to reach between 2°C and 2.5°C. This scenario is most similar to the IPCC’s RCP6.0 and SSP2. The economy slowly decreases its dependence on fossil fuel.
  • No Mitigation. In this scenario, the world is oriented towards economic growth without any special consideration for environmental challenges. This is most similar to the IPCC’s RCP8.0 and SSP5. In the absence of climate policy, the preference for rapid conventional development leads to higher energy demand dominated by fossil fuels, resulting in high greenhouse gas emissions. Investments in alternative renewable energy technologies are low but economic development is relatively rapid.

The modelled long-term performance for a range of typical investment portfolios is worrying:

CISL suggest quite different investor behaviour depending upon which climate change path they think the world is taking: moving into High Fixed Income if No Mitigation seems to be the direction we are heading, but adopting an Aggressive (ie 60% equities, 5% commodities) asset allocation if the Two Degrees scenario looks most likely.

Elsewhere the report suggests hedging via cross-industry diversification and investment in sectors with low climate risk. For example under No Mitigation, it is possible to cut the maximal loss potential by up to 47% by shifting from Real Estate (in developed markets) and Energy/ Oil & Gas (in emerging markets) towards Transport (in developed markets) and Health Care/ Pharma (in emerging markets). However over 50% of losses in all scenarios remain unhedgeable (ie unavoidable through clever asset allocation alone).

The second report (Investing in a time of climate change) from Mercer in 2015, focuses on the following investor questions:
• How big a risk/return impact could climate change have on a portfolio, and when might that happen?
• What are the key downside risks and upside opportunities, and how do we manage these considerations to fit within the current investment process?
• What plan of action can ensure an investor is best positioned for resilience to climate change?

The section I was drawn to here (it’s a long report) was Appendix 1 on climate models used, and particularly those estimating the physical damages and mitigation costs associated with climate change. The three most prominent models used for this are the FUND, DICE and PAGE models, apparently, and Mercer have opted for FUND. They have then produced some charts showing the difference between the damages exepcted for different levels of warming predicted by the FUND model compared to DICE:

The result of this comparison, showing lower damage estimates by the FUND model, led the modellers to “scale up” certain aspects of the output of their model to achieve greater consistency.

Both of these reports have been produced using complex models and a huge amount of data, carefully calibrated against the IPCC reports where appropriate and with full disclosure about the limitations of their work, and I am sure they will be of great help to pension scheme actuaries (although there does some to be some debate about this). However I do wonder whether as a profession we should be spending less time trying to find technical solutions in response to worse and worse options, and more time trying to head off the realisation of those sub-optimal scenarios in the first place. I also wonder whether the implicit underlying assumption about functioning financial markets and pension scheme funding is a meaningful problem to be grappled with at 3-4° above pre-industrial averages as some of this analysis suggests.

In the summary of Mark Lynas’ excellent book Six Degrees: Our Future on A Hotter Planet, the three degree increase for which damages are being estimated is expected to lead to Africa […] split between the north which will see a recovery of rainfall and the south which becomes drier […] beyond human adaptation. Indian monsoon rains will fail. The Himalayan glaciers providing the waters of the Indus, Ganges and Brahmaputra, the Mekong, Yangtze and Yellow rivers [will decrease] by up to 90%. The Amazonian rain forest basin will dry out completely. In Brazil, Venezuela, Columbia, East Peru and Bolivia life will become increasingly difficult due to wild fires which will cause intense air pollution and searing heat. The smoke will blot out the sun. Drought will be permanent in the sub-tropics and Central America. Australia will become the world’s driest nation. In the US Gulf of Mexico high sea temperatures will drive 180+ mph winds. Houston will be vulnerable to flooding by 2045. Galveston will be inundated. Many plant species will become extinct as they will be unable to adapt to such a sudden change in climate.

The [IPCC] in its 2007 report concluded that all major planetary granaries will require adaptive measures at 2.5° temperature rise regardless of precipitation rates.[and] food prices [will] soar. Population transfers will be bigger than anything ever seen in the history of mankind. [The feedback effects from the] Amazon rain forests dry[ing] out and wild fires develop[ing] [will lead] to those fires [releasing] more CO2, global warming [intensifying] as a result, vegetation and soil begin[ning] to release CO2 rather than absorb[ing] it, all of which could push the 3° scenario to a 4°-5.5° [one].

The last time the world experienced a three degree temperature rise was during the geological Pliocene Age (3 million years ago). The historical period of the earth’s history was undoubtedly due to high CO2 levels (about 360 – 440ppm – almost exactly current levels). I would suggest that our biggest problem under these conditions is not that over 50% of losses on pension scheme investments remain unhedgeable.

In his recent article for Social Europe, the unbearable unrealism of the present, Paul Mason presents two graphs. The first is the projection by the United States’ Congressional Budget Office of the ratio of debt to gross domestic product until 2048 in the United States.

The second is a chart from the IPCC showing how dramatically we need to cut CO2 emissions to avoid catastrophic and uncontrollable breakdown.

Mason feels that capitalism is too indebted to go on as normal and too structurally addicted to carbon. In his view Those who are owed the debt, and those who own rights to burn the carbon, are going to go bankrupt or the world’s climate will collapse. This feeling is echoed by George Monbiot here, where he cites a paper by Hickel and Kallis casting doubt on the assumption that absolute decoupling of GDP growth from resource use and carbon emissions is feasible and summarises some alternative approaches to the capitalism he feels no longer has the solutions.

Others dispute this, claiming that the Green New Deal is the only chance we have (here, here and here) to prevent irreversible climate change.

Whether you agree with any of these predictions or none of them, agree that we face a climate emergency or feel that is too extreme a description, it all brings me back to Kahn and Dr Strangelove. We seem to have replaced the MAD of the cold war with the MAD of climate change, except that this time we do not even have two sides who can prevent it happening by threatening to unleash it on each other. It is just us.

What we really cannot afford to be doing, via ever more complex modelling and longer and longer reports, is giving the impression that the finance industry can somehow “win” against climate change rather than joining the efforts to avert it as far as possible.

Since my last post on the strike, where I set out my reasons for not joining it, a lot has happened. The strike has forced UUK back to the negotiating table, overseen by ACAS, on a deal originally presented as done. The consultation period on the new arrangements has been postponed. University Vice Chancellors are scurrying to distance themselves from the UUK negotiating position and side with their own striking lecturers. As most observers admit, including most recently the Head of Public Sector Pensions at KPMG in the tweet below, the UCU have won the communications battle. Victory appears to be total.

However there remains a problem, which we seem to be facing increasingly in recent years from Trump to Brexit, and that is this: what to do when the victory you have won is based on campaign arguments which are fundamentally untrue, not backed by evidence or existing pensions legislation, and ultimately undeliverable? Just keep saying no to any workable option which is put to you?

How untrue? Well let’s go back to the now famous letter to the FT signed by many famous lecturers across the UK, including David Spiegelhalter, Ben Goldacre and Steven Haberman (notable as he is deputy director of the Actuarial Research Centre). This was itself a response to a FT story based on the audited accounts, where the pension deficits were merely being updated in line with what had previously been agreed and bore no relation to the negotiations about the March 2017 valuation. As the audited accounts state quite clearly:

The trustee regularly monitors the scheme’s funding position as part of the overall monitoring of FMP introduced followed the 2014 valuation. The monitoring is based on the assumptions used for the 2014 actuarial valuation (updated for changes in gilt yields and inflation expectations). The monitoring does not involve the same detailed review of the underlying assumptions (including the financial, economic, sectoral assumptions for example) that takes place as part of the full actuarial valuation, the next full actuarial valuation being due as at 31 March 2017. Therefore the amounts shown for liabilities in the funding position below are not indicative of the results of the 2017 valuation.

So arguing about these assumptions was futile. The letter also showed an unexpected lack of understanding (particularly from Steven Haberman, who must have spent enough time in the company of pensions actuaries who carry out these kinds of negotiations all the time to know better) about what the assumptions shown in the accounts meant. In particular, there is a note saying that the general salary assumption is only being used for the recovery plan contributions rather than to calculate the scheme deficit. That means that, if you think the assumption is too large, it will be overstating the value of future contributions and therefore understating how large those contributions need to be. So rather than making the scheme seem more unaffordable, it would be making it seem less.

Then there is the mortality point – a massive misunderstanding. The assumptions do not say that life expectancy is increasing by 1.5% pa which would clearly be absurd. They are saying that mortality improvements (ie the percentage by which the expected probability of death of a 70 year old in 2020 is less than that of a 70 year old in 2019) are assumed to be 1.5% pa. Stuart McDonald gently put Ben Goldacre right on this point here.

However the bigger overall point is that individual assumptions are not the thing to focus on here anyway, but the overall level of prudence or otherwise in a basis. And the facts around this are considerably clearer.

  • We know that the initial valuation proposed by the USS Trustee to the Pensions Regulator and the covenant assessment on which it was based (ie the willingness and ability of the employers in UUK to continue paying contributions) were both rejected. As this initial valuation disclosed a deficit of just over £5 billion, then the proposal resulting in a £7.5 billion deficit which was finally presented to the Joint Negotiating Committee would appear to be as low as the Trustee could reasonably go and still get the valuation past the Regulator.
  • The S179 valuation of the scheme (this is the valuation all occupational pension schemes who pay levies to the Pension Protection Fund as insurance against the failure of their employer(s), which is done on the same valuation basis for all schemes) at the last valuation as at 31 March 2014 showed a deficit of £8.95 billion (compared to the £5.3 billion funding deficit disclosed). The latest “more prudent” valuation proposed is therefore still unlikely to be proposing a target which goes anywhere near 100% funding on this basis (the scheme was only 82% funded in March 2014 when, as you can see below, nearly 40% of schemes were in surplus on this measure). There is therefore no justification for the repeated assertion by the UCU that the scheme is not under-funded.

Source: Commons Work and Pensions Select Committee report on defined benefit pension schemes 20 December 2016

One last point on the campaign. Some of it seems to have been directed personally at the USS Trustee. This is the body with no other job than to protect the security of the pensions that lecturers have already built up. Why would anyone want to turn on them? Bill Galvin, the Group CEO at USS Ltd, the Trustee company, has set out responses to some of the other misconceptions here. I would urge anyone with an interest in this dispute to read them.

So, if the deficit is what it is and there is no scope for weakening the funding assumptions any further and maintaining current benefits on these funding assumptions involves contribution increases which are unacceptable to both scheme members and the employers, what is this dispute about now? The time has come for lecturers to decide what they want. Of course the basic premises of pension scheme funding can be argued about (and I direct anyone interested in the long history of actuarial debate in this area to read chapter 6 of Craig Turnbull’s A History of British Actuarial Thought which traces this from 1875 to 1997), and perhaps ultimately legislative change might be brought about if a new argument could be won in this area. But that is a long term objective and the funding of this scheme needs to be agreed now. If a £42,000 cap for 3 years while negotiations continue on a long term structure of the scheme which doesn’t leave all risk with scheme members is not acceptable, then we need to decide pretty quickly what is. Because once we move to a DC arrangement, the chances of us moving back to any form of risk sharing subsequently are in my view remote. There will always be other uses for that money.

However there are many possible alternative structures and many ways of sharing the risks between employers and scheme members. In particular let’s not get too obsessed with Collective Defined Contribution schemes, the enabling legislation for which has yet to materialise. Consider all the alternatives and let proper negotiations commence!

 

While the NHS has been asked to find £22 billion in savings by 2020, the latest figures from the Student Loans Company show that over £13 billion has been found to fund student loans for 2016/17 alone, without increasing the Government’s deficit and without appearing in the Public Sector Borrowing Requirement until some time in the 2040s. How is this possible?

The key difference is that the money the Government provides in student loans are seen as just that: loans. However, unlike any other kind of loan (and the reason that commercial banks declined to join the SLC – which was the original plan and the reason it was set up with a company structure), only between 40 and 45% is expected ever to be repaid, the repayment term is limited to a maximum of 30 years and the payments limited to a percentage of earnings above a minimum earnings threshold (which is about to increase to £25,000 pa). It is in reality a graduate tax masquerading as a loan, with the “sticker price” of £9,250 pa (which is of course a real price for overseas students) just used to ensure students don’t feel like they are paying this tax on someone else’s behalf. However the payments made by the Government since 2011 as “loans” have not led to any outcry about uncosted commitments, or passing the bill onto future generations which you might expect. Which is surprising, as it has meant that Higher Education has effectively been allowed to sidestep the austerity policies applied to just about every other Government department completely.

One might think that the architect of such a scheme would be quite popular within the Higher Education space. Far from it. Since the announcement of his appointment as the new Chancellor at the University of Leicester, the Leicester branch of the UCU has widened the campaign it is already running against the Joint Negotiating Council’s decision to close the USS pension scheme to further defined benefit accrual to embrace a #WillettsOut position. The students who occupied the corridor outside the Leicester VC’s office for two days similarly had Willetts’ removal on their list.

Apart from elements of his voting record (he was strongly in favour of an elected House of Lords and was strongly against the ban on fox-hunting. TheyWorkForYou additionally records that, amongst other things, he was strongly in favour of the Iraq War, strongly in favour of an investigation into it, moderately against equal gay rights, and very strongly for replacing Trident), the main charges against him seemed to date from an article about him in the Guardian from 2011.

Now without minimising the differences of opinion which I and many of my colleagues will clearly have with David Willetts on a wide range of issues, I do think we are in danger of surrounding ourselves with the comfortable cushions of like-minded individuals all equally in the dark about the regulatory changes in store for us and at risk of all the worst consequences of Group Think. I would therefore like to put forward an alternative view.

The University of Leicester is facing, along with the rest of the Higher Education sector, serious challenges over the coming decades in response to an expansion of the proportion of young people going to university which no political party is going to want to reverse (and which I, for one, would not want them to). David Willetts was the chief driver of much of these reforms and has a clear vision of what they are trying to achieve, set out in his book A University Education. He is currently a visiting professor at King’s College London where he works with the Policy Institute at King’s, a visiting professor at the Cass Business School, Chair of the British Science Association, a member of the Council of the Institute for Fiscal Studies and an Honorary Fellow at Nuffield College, Oxford. However his real passion is around social mobility, something which I believe is important to many of us here at Leicester, and which has led him to a role as Executive Chair of the Resolution Foundation. As a former cabinet minister and shadow cabinet minister from 1996 until 2014, Willetts is very well connected, a formidable debater and would make a fierce friend of the University, fighting Leicester’s corner in what is likely to be an increasingly challenging period.

David Willetts would undoubtedly bring significant challenge with him. Arguing with him (I watched him in debate with Stefan Collini and a variably outraged university audience at the Senate House last year) can sometimes feel like doing battle with a hammer. But it may be that this is what we need to respond successfully to the new world which is coming rather than yet another comfortable cushion to make us feel better. Let’s welcome him inside the tent.

This is a piece largely written as a rebuttal to Waseem Yaqoob’s recent article on the LRB blog, entitled Why We Strike. Let me start by clearly stating that I support the University and College Union’s (UCU’s) right to strike from Thursday, and think it is ludicrous that 7 of the 68 ‘pre-92’ universities’ UCU groups need to reballot their members before they are allowed to carry out what is clearly the majority view of their members. I just think they are wrong this time.

The Joint Negotiating Committee (JNC – apologies there are lots of acronyms in this) of the Universities Superannuation Scheme (USS) is the body tasked with negotiating the pension deal struck every 3 years. It has equal numbers of members from Universities UK (UUK – representing the employers (over 390 of them)) and the UCU, with an independent chair who gets to cast the deciding vote on matters when the other JNC members are in deadlock. Just such a deadlock occurred over the future of the USS. The UCU representatives wanted to continue with some sort of defined benefit (DB) arrangement, where benefits are guaranteed, and the UUK representatives wanted to switch to defined contribution (DC), where contributions are instead paid into an invested fund for the member to secure benefits with as best they can at retirement. The chair went with the UUK position.

As a member of the USS as a result of working as a lecturer at the University of Leicester, I fervently hoped for a different outcome for purely selfish reasons. However I could not justify why I should have a DB pension (which I agree is a vastly superior option to the DC alternative being offered) when the vast majority of DB schemes are already closed, including let’s not forget the University of Leicester Pension and Assurance Scheme, which has been closed to new entrants since 2003 and to future accrual since 31 March 2016. Is it realistic or reasonable to assume that Grades 6 and above will continue to enjoy DB accrual indefinitely while Grades 5 and below don’t?

You will hear a lot about how something which is personally disadvantageous to one lecturer after another is therefore suddenly going to damage higher education irrevocably, depicting academic life as so uniquely risky that only the safety blanket of a DB pension will persuade people to do it. This is despite them not being seen as necessary in many other top global universities. For
example, the top universities in the United States mainly have DC pension schemes.

The rationale for the changes is not dubious. The vast majority of DB pension schemes follow the same funding approach as the one used by the USS which has revealed such large deficits, as was recently confirmed by research carried out by Punter Southall. Most research points to a gilts plus basis being the most appropriate for a scheme still open to future accrual.

Neither do I agree that the funding approach proposed is unduly prudent. The Government has produced a green paper, which was largely based on the report from the Commons Select Committee for Work and Pensions in December 2016, which was itself in response to what happened at Tata Steel and BHS in particular. The Select Committee report suggested legislation was needed to:

  • Agree changes to the indexation of pension benefits in instances where such changes are needed to make a scheme sustainable
  • Allow scheme members greater flexibility to take their pension as lump sums
  • Make recovery plans of more than 10 years exceptional (the USS currently have a recovery plan of 17 years, 14 of which are still outstanding – reducing this to 10 would considerably increase the contributions required into the scheme).

It did not focus on valuation methods particularly.

However the resultant green paper, which launched a consultation which ended in February 2017, considered 6 questions, the first of which was focused on whether current valuation measures were the right ones. Unfortunately the detailed discussion (eg in paragraph 213) was hardly encouraging to the view that the USS funding basis is too prudent and the contribution requirements too high, as it suggested that stricter interim funding targets be set for schemes which were severely underfunded and gave an example of what they meant by this as being less than 100% funded on the Pension Protection Fund (PPF) basis (this is the pensions lifeboat for schemes with insolvent employers – USS was 82% funded on the PPF basis at the last valuation).

One point where I am in agreement with Yaqoob is that the success of the strike will depend to a large extent on how students respond. I was amused by the admission that “Students have expressed solidarity with striking staff while at the same time demanding refunds for their disrupted education”. I believe that the solidarity with striking staff is due to misinformation, whereas the demand from students for refunds for their disrupted education are likely to be more long-lasting.

I have resigned my membership of the UCU as a result of this ill-conceived strike action. I urge other members who feel a similar discomfort about what they are being asked to do to consider whether they need to do the same.

There has been a lot written about the State Pension Age (SPA) in the UK in the last year. This was primarily because the UK Government has been carrying out its first periodic review of the SPA. John Cridland was asked to carry out an independent review of the State Pension Age, which reported in March this year with over 150 responses received and 12 recommendations made plus a proposal for an auto enrolment review. This was followed by the Secretary of State for Work and Pension’s report on the first Government review of State Pension age, as required under the Pensions Act 2014 last month, in which Cridland’s central recommendations on the timetable for SPA change were accepted, ie:

  • The State Pension age should continue to be universal across the UK, increasing over time to reflect improvements in life expectancy.
  • The State Pension age should increase to age 68 between 2037 and 2039.
  • The State Pension age should not increase by more than one year in any 10-year period (assuming there are
    no exceptional changes to the data used).
  • Individuals should get 10 years’ notice of any new changes to State Pension age.

However the report was noticeably silent about Cridland’s other recommendations, including:

  • that means-tested access to some pension income will remain at 67 and will continue to lag a year behind for rises thereafter.
  • that the conditionality under Universal Credit should be adjusted for people approaching State Pension age, to enable a smoother transition into retirement.
  • supporting working past State Pension age
  • to do more to help carers in the workplace:
  • the provision of a Mid-life MOT
  • support for the use of older workers as trainers

Other commentators have given their analysis, some, like the Work and Pensions Parliamentary Select Committee, have pointed out that many people will not live to see the new SPA, something rather lost in the massive groupings Cridland referred to where the lowest average was across a group titled “Routine”. These were described as socio-economic groupings but seemed in reality to be more occupational. There is some reference to healthy life expectancy, but no attempt to quantify how this varies by population. It therefore gives the rather misleading average of around 10 years of healthy life expectancy at age 65 for both men and women.

Contrast this with the Office of National Statistics’ (ONS) rather more comprehensive look at the subject and, in particular, these graphs:

The graphs are more encouraging for women in terms of life expectancy, but no more encouraging for healthy life expectancy.

Other commentators such as the OECD have suggested that the top 5-10% wealthiest stop receiving it altogether to allow it to be more generous for everyone else. The most prominent actuarial view so far has probably come from Paul Sweeting, who proposes a means tested approach to paying state pension which allows the pace of SPA increase to be slower but at the same cost. While I share most of Paul’s analysis of the problem, I do not share his conclusion that the only solutions are faster increases to the State Pension Age, or means testing. My problems with means testing as opposed to universal benefits boil down to two main objections:

  • People will not contribute to other savings vehicles if they think these will just reduce benefits elsewhere. This was how the Minimum Income Guarantee killed the Stakeholder Pension.
  • Many people do not claim means tested benefits which they are entitled to. Whether through pride or fear of the dauntingly long forms the DWP produce for any claimed benefit or a combination of the two, a study in 2003 indicated that 1 in 6 people did not claim benefits representing over 10% of their total income.

I therefore think there has to be another way, and I think it might be a form of universal basic income (UBI). Compass have produced one of the more recent reports on the feasibility of this, and there are many different forms, with full schemes or pilots now running mainly at a regional level at present in the United States, Canada and India amongst other countries.

The basic features of most of these schemes are that the personal allowance is abolished in favour of a regular income paid to everyone, perhaps with different rates at different ages but not means tested. Different schemes make different adjustments to existing taxes and maintain different combinations of existing benefits, both means tested and universal. Compass have modelled five possible schemes, and believe that paying a lower UBI but leaving in place the current means-tested benefits system while reducing households’ dependence on means testing by taking into account their UBI when calculating them may be a feasible way forward.

The main arguments for a UBI approach are:

  • it would directly address most of the inequality of outcomes discussed above, particularly the decile likely to be condemned to 18 years of work in ill health and a retirement of 4 years by 2037 unless both their life expectancy and healthy life expectancy increase, at exactly the time when both appear to be slowing (at the 0.4 months pa rate of improvements since 2011, these expectancies would only have increased by 8 months by 2037)
  • by providing a guaranteed minimum income, the safety net we provide as a society would be much more robust, and that reducing the reliance on means testing would tackle the problems of take up and the inevitable poverty traps which means testing creates
  • people could choose to work less and have more time for other things (although previous experiments suggest this number would be small), alternatively it would make retraining much easier
  • people would have more bargaining power in the labour market, which is clearly problematic in the UK in particular, with the stagnation of real wages for a considerable period now

Many people think their jobs are useless and that they are trapped in them with no marginal income to let them transition to something more meaningful. Neither does it seem as if getting everyone into work is good for us physically, further exacerbating the healthy life expectancy problem at lower deciles.

I am therefore surprised that there is not more research into feasible UBI schemes. The reference section at the back of the Compass report was shorter than that in many of my 3rd year undergraduate dissertations, and yet it is clearly an area in urgent need of some modelling. Anyone out there fancy joining me in a working party to look at this?

The Institute and Faculty of Actuaries (IFoA), through its Actuarial Research Centre, is inviting research teams and organisations to submit proposals for a research project on modelling pension funds under climate change. The research is intended to address the need for pensions actuaries to understand the potential magnitude of climate change impacts, and hence if and when climate change might be relevant to the funding advice they give. What areas in particular might be useful to look at through the lens of a pension actuary?

The current concentration of carbon dioxide in the Earth’s atmosphere is around 400 parts per million by volume (ppmv), or a little over 140% of the generally accepted pre-industrial level of 280 ppmv. What level we can cap this at depends on how we respond in every country in the world. There are therefore many opinions about it:

Source: IPCC AR5: Fig 2.08-01 

Here RCPs stand for Representative Concentration Pathways, and are meant to be consistent with a wide range of possible changes in future anthropogenic (i.e. human) greenhouse gas emissions. RCP 2.6 assumes that emissions peak between 2010-2020, with emissions declining substantially thereafter. Emissions in RCP 4.5 peak around 2040, then decline. In RCP 6.0, emissions peak around 2080, then decline. In RCP 8.5, emissions continue to rise throughout the 21st century. What this means is that the best we can hope for now is a scenario somewhere between RCP 2.6 and RCP 4.5, with the US Government’s Environmental Protection Agency appearing to believe that RCP 6.0 is the most realistic scenario. As you can see, RCP 4.5 assumes an eventual equilibrium at around 500 ppm, or about 180% of pre-industrial levels and RCP 6.0 an equilibrium at around 700 ppmv, or about 250% ppmv.

Equilibrium climate sensitivity is defined as the change in global mean near-surface air temperature that would result from a doubling of carbon dioxide concentration. A doubling of the pre-industrial level to 560 ppmv (ie between the RCP 4.5 and RCP 6.0 assumption) has been projected to result in a range of possible outcomes:

Source: IPCC 2007 4th Assessment Report, Working Group 1 (Figure 9-20-1)

This is certainly a bit of a we know zero kind of graph, but has worryingly fat tails indicating reasonable chances of 10 degrees plus added to average global temperatures. To put this in context, let’s use the approach taken in Mark Lynas’ excellent “Six Degrees“, where the combined research into the effects of each additional degree above pre-industrial global temperatures is collated to allow us to view them as distinct possible futures. Some examples are as follows:

One degree

We are nearly here (around 0.8ᵒ so far):

  • Return of the “Mid-west American dust bowl” but with greater vengeance
  • Increase in hurricane activity
  • Loss of low lying islands, eg Tuvalu

Two degrees

The “safe” level we are trying to limit increases to:

  • Release of greenhouse gases begin to alter the oceans. May render some parts of southern oceans toxic to Ca CO3 and thus to one of life’s essential building blocks, plankton.
  • Heatwaves like 2003 which killed 35,000 people in Europe and led to crop losses of $12 billion and forest fires costing $1.5 billion will occur almost every other summer.
  • Crippling droughts can be anticipated in Los Angeles and California
  • From Nebraska to Texas the anticipated drought would be many times worse than the 1930s “dust bowl” phenomenon.
  • Polar bears would probably become rapidly extinct.
  • Mediterranean countries will become drier and hotter with significant water shortages.
  • IPCC estimate sea level rise of 18 to 59 cms.
  • Monsoons would increase in India and Bangladesh leading to mass migration of its populations.
  • International food price stability will have to be agreed to prevent widespread starvation.

Three degrees

  • Africa will be split between the north which will see a recovery of rainfall and the south which becomes drier. This drier southern phase will be beyond human adaptation. Wind speeds will double leading to serious erosion of the Kalahari desert.
  • Indian monsoon rains will fail. ·
  • The Himalayan glaciers provide the waters of the Indus, Ganges and Brahmaputra, the Mekong, Yangtze and Yellow rivers. In the early stages of global warming these glaciers will release more water but eventually decreasing by up to 90%. Pakistan will suffer most, as will China’s hydro-electric industry.
  • Amazonian rain forest basin will dry our completely with consequent bio-diversity disasters
  • Australia will become the world’s driest nation.
  • New York will be subject to storm surges. At 3° sea levels will rise to up to 1 metre above present levels.
  • In London, a 1 in 150 year storm will occur every 7 or 8 years by 2080.
  • Hurricanes will devastate places as far removed as Texas, the Caribbean and Shanghai.
  • A 3° rise will see more extreme cyclones tracking across the Atlantic and striking the UK, Spain, France and Germany. Holland will become very vulnerable.
  • By 2070 northern Europe will have 20% more rainfall and at the same time the Mediterranean will be slowly turning to a desert.
  • More than half Europe’s plant species will be on the “red list”
  • The IPCC in its 2007 report concluded that all major planetary granaries will require adaptive measures at 2.5° temperature rise regardless of precipitation rates. US southern states worst affected, Canada may benefit. The IPCC reckons that a 2.5° temperature rise will see food prices soar.
  • Population transfers will be bigger than anything ever seen in the history of mankind.

Three degrees obviously needs to be avoided, let alone ten, but the problem is that business as usual for the finance industry may not be the way to get there. As some recent research has suggested, financial market solutions to environmental problems, such as carbon trading, may be ineffective. As the authors state: By highlighting the tenuous and conflicting relation between finance and production that shaped the early history of the photovoltaics industry, the article raises doubts about the prevailing approach to mitigate climate change through carbon pricing. Given the uncertainty of innovation and the ease of speculation, it will do little to spur low-carbon technology development without financial structures supporting patient capital.

Patient capital is something developed economies have been seeking for some time, whether it is for infrastructure investment, development projects or new energy sources, and no good way to create it within the UK private sector has been found yet, including various initiatives to try and get an increase in pension scheme investment in infrastructure projects. It therefore seems to me to be the wrong question to ask what impacts climate change are likely to have on the assumptions used for pension scheme funding, when it is the impact of the speculation which pension scheme funding encourages which is one of the main drivers of our economies towards the worst possible climate change outcomes.

A more productive research question in my view would be to bring in legislators and pensions lawyers as well as environmental scientists and others researching and thinking in this area alongside actuaries to look at how we could change the regulatory framework within which pension scheme funding and investment within other financial institutions where actuaries are central takes place. There is already research into what changes may be necessary to international law to reflect the new Anthropocene era the planet has entered, where the dominant feature is the impact of human activity on the environment. In my view this should be extended to the UK legislative and regulatory landscape too.

If the models are correct we are heading for a Zombie Apocalypse

Let’s forget the strapline of this blog for a moment and assume that the models are correct. The Pension Protection Fund (PPF) is targeting “self-sufficiency” by 2030, ie no more levies from sponsors of pension schemes required for it to independently fund all the future benefits of every scheme member whether they are already in the PPF or going to end up in it with only the insufficient assets their former employers allocated to their former pension schemes for company. BHS has concluded a very high profile deal in the last couple of weeks to set up a new self-sufficient scheme for its former employees. The Universities Superannuation Scheme (USS) has proposed a funding plan which targets self-sufficiency less a “covenant” (ie amount of money feasible to get out of the university sector in the future) by 2031. John Ralfe mentioned a few other examples in his article from 2015.
These are schemes which have been dubbed “zombie” schemes on the basis that they are basically dead, with no new money or new members coming in, but nevertheless dragging themselves along the floor year after year until all of their members have stopped twitching.
What does the UK pensions world look like in 2030? Well according to various sources:
• UK population will have increased to 70.6 million (assuming Scotland and Northern Ireland are still in it) with 21.4% of them over the age of 65 (S&P)
• Credit rating of UK will have fallen to A, with a further fall to BBB by 2035 assuming no change in economic policy (also S&P)
• Average life expectancies at birth in UK would be over 85 for women and 82.5 for men (Imperial College and WHO)
• Benefit outgo from defined benefit pension schemes is £100 billion more than contribution income pa (Hymans Robertson)

This does not sound like a happy place for our zombies to be negotiating with the occasional limb getting torn off as multiple doors are slammed in their faces. Although the self-sufficiency route is now a common approach amongst large schemes, it is largely untested. No scheme as far as I am aware has actually managed to run in a self-sufficient manner for any appreciable length of time, whereas the more expensive buy out route (where the benefits for members are purchased in the form of contracts with an insurer) is by comparison well established.

So off into this volatile landscape our zombies will be let loose, trying to run themselves like little insurance companies, but without the scale or diversification or experience which makes insurers (mostly) survive for long periods. However that better track record comes at a price which schemes are currently reluctant to pay. There is a good chance that this experiment will not end well.

My guess for 2030? That the volatile landscape will have claimed some casualties amongst the self-sufficient zombies and put them into the PPF with much bigger deficits than if they had gone there straight away. And then all the other zombies will T-U-R-N A-R-O-U-N-D V-E-R-Y S-L-O-W-L-Y and follow them there. At which point the PPF will realise that they are undead no longer.

Party membership long timeline

Today I am going to talk about politics and how we tend to approach it.

When I was working as an actuarial consultant we had a client who wanted to write to the local MP about how the Pension Protection Fund levy his company were paying on behalf of their admittedly poorly funded pension scheme was endangering the viability of the business itself. Our view was that it would do no harm and the letter was sent. Nothing came of the complaint, not that we had expected anything would, but the letter was responded to. And so have my letters both times I have written to my MP in a personal capacity, one of them even came back with a Minister’s letter enclosed with it.

One way of looking at this is that it is fantastic. It shows democracy working for individuals and businesses at a local level about the issues they care about. A kind of democracy service. This is certainly how we are encouraged to think of it.

However another way of thinking about it is that this is just bonkers. To understand this, consider some numbers.

There are not nearly enough GPs, according to the latest of many similar reports of a “looming health crisis”. How many full-time equivalent GPs are there per 1,000 patients per practice in England? 0.58, meaning that on average there is 1 GP for every 1,724 patients. GPs frequently complain that the standard 10 minute consultation this necessitates is not enough time to fully explore their health.

Compare this with the position of MPs, another profession which runs “surgeries”. There are 650 MPs to cover the whole of the UK. That’s one for every 92,000 people, or 68,000 voters. It is therefore faintly ludicrous to expect MPs to be able to:

  • write to a relevant department or official;
  • send a letter to an appropriate Minister;
  • make a personal appointment to discuss an issue;
  • make an issue public; or
  • speak at an event concerning an issue.

for each and every one of his or her constituents and their businesses, as the blurb suggests. “These steps can often go a long way to providing a solution” it adds helpfully.

If we were all to take up this suggestion of course, the system could not cope. And it cannot, by definition, be fair: a 92,000th of the power of an MP, even if it’s the PM, is probably not worth having in your corner, so the process MP’s use to decide who to help becomes a postcode (or, in reality, power) lottery on a much grander scale than anything we might be concerned about in the NHS. So beware of MPs who say that their minds have been made up on an issue by what can only ever be anecdotal contact with their constituents at best.

Even when most of us don’t bother our MPs, they are still inundated with a level of enquiries, most misdirected, that makes it very hard for them to keep up with their parliamentary work.

So it is perhaps not unreasonable to suggest that an entirely parliamentary approach to doing politics might not be the only option. And now the Labour Party are exploring this idea in the current leadership election. To the side now coalescing around Owen Smith, Corbyn’s policy-making on the hoof and lack of organisation and discipline at times makes him unfit to lead a party set up in 1906 to promote “socialism via parliamentary means”. To Corbyn’s supporters, the party needs to become a movement not confined to Parliament, and the sudden surge in party membership to 450,000 and £4.6 million collected in 48 hours from the £25 fee paid by registered supporters are signs that he is the person who can deliver this.

People cannot agree whether Jeremy Corbyn represents the past or the future, which certainly makes the present very exciting. But if MPs are too busy to represent us the way we want to be represented, we may all need to get more involved in politics from now on.