Whether or not there is a strike, USS’s future depends on trusting its members

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.

Dr Strangelove’s Pension

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.

The Bullshit Alternative

I have seen two very different pictures of the future of professional life over the last year or so. The first, which I wrote about over a year ago, was presented in The Future of the Professions by Richard and Daniel Susskind, and has been much debated since within the actuarial profession for what the implications might be for the future. In summary, the Susskinds set out two possible futures for the professions. Either:
• They carry on much as they have since the mid 19th century, but with the use of technology to streamline and optimise the way they work;
• Increasingly capable machines will displace the work of current professionals.

Their research suggests that, while these two futures will exist in parallel for some time, in the long run the second future will dominate. Indeed Richard Susskind has gone further in setting out what that future might look like for the legal profession, where he sets out future strategies for surviving in a world of increasingly capable machines as:

  • providing more for less (ie charging less (in particular the end of time cost fees), alternative billing arrangements such as “value billing”, making efficiencies and collaboration strategies where clients come together to share costs);
  • liberalising services (ie allowing a wider range of people to provide legal services); and
  • technology (ie online services in all of their forms to make the delivery of these cheaper, increasing use of data scraping, text mining, etc to replace what was previously done through expert judgement).

So far, so expected. The relentless increase in technological capability is bound to demand increased efficiency and leaner organisations competing ruthlessly in a pitiless market, right?

Enter an alternative vision for the future. Pointing out that we have been here before and that Keynes had speculated in 1930 that

In quite a few years – in our own lifetimes I mean – we may be able to perform all the operations of agriculture, mining, and manufacture with a quarter of the human effort to which we have been accustomed.

David Graeber, in his latest book Bullshit Jobs, points out that this never happened, despite pretty much all of the technological developments and income increases which Keynes predicted. He suggests that this future which the Susskinds are predicting is already happening in terms of needing fewer people to fill the meaningful roles within organisations but that, rather than employing fewer people, we are either creating “bullshit” jobs which even the people doing them can see no point to or bullshitizing existing roles for which the meaningful need has passed. It is as if the organisations themselves have attempted to maintain the outward appearance of the same structures by disguising the hollowing out of so many of their functions with simulated business.

It is an intriguing alternative vision of how the professional world might develop which has come in for some criticism, the most serious of which Graeber attempts to address in his book. One of the reasons he thinks the situation has been allowed to develop is that noone believed that capitalism could produce such an outcome. But that is only if you accept the rational profit maximising principle, which many economists have now abandoned as an explanation for corporate or individual behaviour. Graeber gives one particularly important example of this in the creation of Obamacare, where Barack Obama “bucked the preferences of the electorate and insisted on maintaining a private, for-profit health insurance system in America”, quoting him as follows:

I don’t think in ideological terms. I never have,” Obama said, continuing on the health care theme. “Everybody who supports single-payer health care says, ‘Look at all this money we would be saving from insurance and paperwork.’ That represents one million, two million, three million jobs [filled by] people who are working at Blue Cross, Blue Shield or Kaiser or other places. What are we doing with them? Where are we employing them?”

So which vision of the future is more likely? I think, at the moment, there is probably more evidence for the Susskind vision, mainly because he has been working in this area for 30 years and therefore many of his predictions, such as the use of email to provide legal advice, have had time to emerge. Many of the stories in Graeber’s book ring true for me and are similar to experiences I have had at times myself, but he has only obtained 300 of them. The YouGov poll which highlighted that 37% of working adults say their job is making no meaningful contribution to the world – but most of them aren’t looking for another one, was based on a sample size of 849. There was also a similar result (in this case 40%) from a survey in the Netherlands, for which I couldn’t easily find the sample size. However this does also lend some weight to one of Graeber’s other contentions in the book that the financial industry might be considered a paradigm for bullshit job creation, as the following graph (from a working paper on this issue by Stolbova et al) shows that the Netherlands and the UK are by far the most financialised economies in the EU.

There are other parts which ring less true for me. For instance, I do not recognise the alternative “non-managerial” university exam paper production process to that shown below (which is just the academic staff sending the exam to a teaching assistant to print and the teaching assistant confirming that he/she has done so) as ever having been remotely acceptable, but this may just reflect the fact that I have been working in academia for a far shorter time than Graeber. However there is no doubt that this is an interesting and useful field of enquiry and potentially concerning for all of us trying to support our graduates in negotiating a meaningful and rewarding entry into the workplace.

There is likely to be significant disruption over the next couple of decades in how we do things and it seems likely to me that there will be many seeking to protect familiar organisational and power structures along the way, as our assumptions about what we want and how we are prepared to have it provided to us are seriously challenged in sometimes unnerving ways. Of the sustainability of these protections ultimately, I am less sure.

How much power should 500 people have within the IFoA?

The Institute and Faculty of Actuaries’ (IFoA’s) response to the recent consultation on the qualification framework was published last week. It made for disappointing reading. The IFoA reiterated its main reasons for wishing to launch a Chartered Actuary qualification as the generalist actuarial qualification which all students should aim for before deciding on whether, and if so which, further specialisation made sense for their careers, ie:

  • make the IFoA more attractive to new entrants;
  • make it easier for actuaries to expand into wider fields, in terms of areas of expertise, geography and non-traditional areas of business;
  • support flexibility for those employers who are increasingly looking for more generalist actuarial expertise;
  • make members more competitive with other professionals in wider fields; and
  • ensure we are globally consistent.

However, the decision has been taken not to pursue this clear no brainer of an initiative. Why? Apparently because of this:

According to the latest membership statistics, the IFoA has 29,889 members. Of these, around 1,300 voted online. Of these, 68% were Fellows. The main reason for not pursuing the Chartered Actuary qualification was given as:

However, 60% of Fellows responding through the online survey expressed concerns about the proposition for the Chartered Actuary title change.

60% of 68% of 1,300 is 530 members, who appear to have effectively blocked something which was clearly in the long term interests of the IFoA and its members as a whole. Even if we accept that some of the other 1,000 other face-to-face consultations had some bearing on the decision, is this really how we want to determine the future positioning of the profession in a crowded market place? As Daniel Susskind suggested in his recent professionalism lecture, the future will be different. If we cannot respond to it rather better than this, we may not be part of it for as long as we might hope.

So what now? The IFoA has said that:

We will continue to consider the designation Chartered Actuary (CAct) as a rebranding of our Associateship (fully qualified actuary) member grade. Over the next few months we will engage further with you, so that we can clarify Council’s thinking on the competencies of CAct and CAct/FIA/FFA and directly address the concerns expressed by Fellows about perceived implications for their status. We will do this before coming to any final decision on our CAct proposal.

So there is all to play for. It will require us to start behaving like a generalist actuarial qualification is what we want, and offering roles for actuaries on completion of core practice modules in future. It will mean not necessarily insisting on further actuarial specialisation as a requirement for senior roles within our firms. It will mean getting comfortable with a much wider range of specialisms amongst those we consider to be actuaries. Some are already doing this, but most of us need to go much further.

At the University of Leicester we believe our MSc programmes should be focused not only on core principles and core practice modules but also allow students to explore other possible areas of further specialisation not currently within the actuarial syllabus, alongside the softer skills employers want to see. We will continue to discuss the details of this approach with interested employers and listen to what they want to see in the graduates they employ. But I predict that the compelling logic of the CAct qualification will prevail eventually, whatever 500 Fellows think about it.

The Time Has Come For Lecturers To Decide What They Want

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!

CAct: the future may be highly uncertain but I am very confident that this is a good idea

 

Sometimes an idea comes along that seems so obviously good that you wonder why it hasn’t been done a long time ago.

The Institute and Faculty of Actuaries (IFoA) are currently consulting on just such an idea in my view: the Chartered Actuary (CAct). Currently someone is a qualified actuary when they get to the associate level, however you wouldn’t know it. There are very few qualified roles available for associates and most firms assume hardly anyone will stay at that point but instead continue to fellowship. Indeed many actuaries leave the CA3 subject (soon to become CP3 under Curriculum 2019) in Communications until last currently, and therefore qualify at both levels simultaneously.

This will happen no more. CAct will be a distinct qualification, and a required qualification point for all student actuaries to reach before going any further. It will be globally recognised as the generalist actuarial qualification from the IFoA, as well as also possibly the final purely actuarial stage of an actuary’s qualification journey in future. The specialisation in actuarial subjects, via the specialist principles and specialist advanced modules, will still be taken by many, particularly those aiming for practising certificates, but there will be time and space for other specialisations: in data science, business management and many other areas. The hope (and I think this is a realistic hope) is that this will massively expand the range of areas where actuaries will be able to make a difference in the future.

Why do we need to? Well, as Derek Cribb, the IFoA’s Chief Executive wrote in the December issue of The Actuary:

Globally, there are around 70,000 qualified actuaries, but more than five million qualified accountants and a similar number of lawyers…Why is this relevant? Bluntly, numbers matter. Whether we are concerned about operational economies of scale, and the consequent impact on membership costs, or whether it’s about building external awareness of the value the profession brings, there is strength in numbers. 

Now of course it can be argued that this is what every corporate leader always wants, and that some not-for-profit organisations could usefully benefit from considering alternative structures (particularly relevant currently in the university sector which I inhabit), but in this case, when our regulatory body the Financial Reporting Council is primarily concerned with another, much larger, profession, the existential threat is real. If you believe as I do that actuaries have a unique skill set, which is likely to be lost to a wide range of businesses and other sectors if it is unable to meet the demand for those skills due to a simple lack of numbers, then the need to take any perceived barrier to practise away from our emerging young professionals is clear.

Whatever your views on this idea, please respond to the consultation, which is open until Wednesday (28 February) and can be found here. I have found widespread support amongst the students I speak to as an actuary working in higher education, both in the UK and also notably in my discussions with Mumbai students earlier this month. I feel it is our responsibility as Fellows not to stand in their way as we in turn hand them the responsibility of taking our profession into a new generation.

The future may be highly uncertain, but I am very confident that this is a good idea.

 

Is reasonable and appropriate good enough?

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Actuaries who are members of the Institute and Faculty of Actuaries (IFoA) have a code. Yes, one or two clients might say, it is the language which they use to deliver all of their advice in. However, the Actuaries’ Code is supposed to set out what principles govern the way actuaries (and all other members of the IFoA) conduct themselves. Launched originally in 2009 with 5 key principles, it had a light touch review in 2013 before the current consultation on a more substantive review (including a new principle). Anyone who has a view about how actuaries should behave in future can take part in this consultation, which officially closes on 17 January (although I understand that responses will be accepted for a few days after this). You don’t need to answer all of the 48 questions, in fact you can just email individual comments to code@actuaries.org.uk if you prefer. I would urge anyone with an interest to do so.

Overall it is clearly a very considered piece of work, which has caused me to think more deeply about some elements of my professional practice. The Code itself is considerably clearer than it was, removing unnecessary detail, improving the visibility of other key regulatory requirements (eg continuing professional development (CPD) obligations and the disclosure requirements under the disciplinary scheme) and structured well with very short pithy principles supplemented by amplifications (and, if necessary, further explanations in an accompanying Guide). The Actuaries’ Code Guide is a completely new document designed to explain the Code in more detail. It is currently 48 pages long, which has caused some to feel that the advantages of having a Code short enough for everyone to read  may have been lost. Then again, moving the 22 pages of it which cover conflicts of interest to a separate document (which I understand is under consideration) would leave a fairly focused document. I think a Guide of some description is necessary, if only to bridge the gap between the Code and other regulations. I do however agree with those who have said the Guide should not be an IFoA document at all, to avoid any perception of a regulatory authority it does not seek.

So, all in all, a good attempt to join up the various regulations governing actuaries’ professional practice.

And yet…it may not be a light touch review, but it’s not exactly heavy touch either.

The first thing that concerns me is what is not here. Both the Code and the Guide appear to be almost entirely concerned with actuarial advice, when there is an increasingly significant body of work carried out by actuaries, particularly in non-traditional areas, which is not advice to clients at all. I work in education, where I am making judgements based at least in part on my actuarial training all the time, but I have to work quite hard to cudgel some of this wording into phrases relevant to me (I think my favourite line is Where Members identify that a user of their work has, or is reasonably likely to have, misunderstood or misinterpreted their advice, Members should draw their attention to any adverse impact, which describes an almost constant state of affairs within a university environment).

There is also nothing here about responding to the impact of automation on the profession. There are many concerns which flow from this, but consider one scenario: increasingly capable artificial intelligence systems, with access to far more data than any individual doctor could possibly take into consideration in making a diagnosis, will be able to offer advice and treatments to patients with better outcomes than even the top practitioners in a given field, and with far more reliable outcomes. According to Daniel Susskind, this is already starting to happen. However, as Cathy O’Neill points out, this increased reliability has immediate outcomes in a health insurance environment:

Just imagine, though, what insurance companies will do with the ability to better predict people’s health care costs. If the law allows, they will increase prices for the riskiest customers to the point where they can’t afford it and drop out, leaving lots of relatively healthy people paying more than they’re expected to cost. This is fine from the perspective of the insurer, but it defeats the risk-pooling purpose of insurance. And in a world of increasingly good predictive tools, it will get progressively worse.

If we do not have any principles in our Code which require us to take account of such considerations, and a direction of travel of increased privatisation of the NHS, what is to stop us actively conniving in such an outcome?

A principle like run your business or carry out your role in the business in a way that encourages equality of opportunity and respect for diversity would be one possibility (courtesy of the code of conduct from the Solicitors Regulation Authority). Another possible approach would be to require individual members to take account of the public interest, using the same professional judgement required to interpret the rest of the Code. It is therefore unfortunate that the IFoA should also have taken this opportunity to point out to members that they have no individual responsibility for such considerations. I strongly disagree with this, a move which was initially a response to the appeal against the ruling against the Phoenix Four. An appeal tribunal that overturned eight of the charges levied against Deloitte criticised the ICAEW for the lack of clarity in its guidance about how accountants should act in the public interest. It seems appalling to me that we would retreat from taking individual responsibility in this area altogether on the back of this.

But what about the new principle that has been added: Speaking Up? There has been some discussion about whether the requirement to speak up has been widened by the phrase Members should challenge others on their non-compliance with relevant legal, regulatory and professional requirements. I am not sure that this will lead to a large increase in whistleblowing in the profession, but I do think that the principle expresses expectations of members much more clearly now and this may have an impact on behaviour. What it doesn’t do is broaden the considerations under which speaking up can take place.

However I think the biggest weakness of the new Code, which undoes a lot of the clarity found elsewhere, may turn out to be the extensive use of just two words. “Appropriate” or “appropriately” turn up four times and the words “reasonable” or “reasonably” nine times. This suggests a shared view of the meaning of these words which I would question exists in a Code which “has no geographic restrictions and applies to Members in all locations and in relation to work carried out in respect of any part of the world”. The IFoA feels it knows what these words mean and doesn’t need to explain them. I think that individual professional judgement would be better applied to interpreting on a daily basis a clear description of what the IFoA means by appropriate and reasonable. That would certainly lead to a narrower range of outcomes, which ultimately has to be the point of any Code.

What if we made the State Pension Age irrelevant?

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?

If providing risk information is ineffective in changing behaviour, why do we do so much of it?

Oceanic whitetip shark. (2014, August 29). Wikipedia, The Free Encyclopedia. Retrieved
11:13, July 22, 2017
from https://simple.wikipedia.org/w/index.php?title=Oceanic_whitetip_shark&oldid=4875771.

Changing people’s behaviour is hard. Even if we have agreed that it needs to change, actually acting on this new knowledge is hard enough, but getting that agreement in the first place by shifting our beliefs is even harder.

It gets worse. The research suggests that providing risk information is ineffective in changing behaviour. You might need to read that again before it sinks in: risk information is ineffective in changing behaviour.

Professor Theresa Marteau, Director of the Behaviour and Health Research Unit at the University of Cambridge, and her team have been looking at the four behaviours responsible for the majority of premature deaths worldwide: smoking, eating too much, drinking too much (alcohol) and moving too little. The original focus of their work concerned how people responded to genetic test results indicating a greater predisposition to diabetes, cancer and other diseases. What they found is that the genetic test may get someone past the first barrier, ie agreeing that they need to change their behaviour, but not the second part, ie actually doing it.

As Marteau says: Few of us would swim in waters signed as shark-infested. On the other hand, when the risk of future disease is up against the pleasures of current consumption, it doesn’t tend to compete very well. Marteau summarises their findings as follows:

Put simply, we overestimate how much our behaviour is under intentional control and underestimate how much is cued by environment.

In my view, this research is directly applicable to the financial services industry and explains a lot of behaviours which have up until now often been considered as separate rather than related problems, eg:

  • The failure of consumers to shop around adequately in the annuities and investment markets (we know we should but get easily discouraged by the difficulty of the process);
  • The stampede to take transfer values out of defined benefit pension schemes (the possibility of immediate consumption trumping deferred gains); and
  • The surge in the tax take at HMRC caused by people removing all of their cash from defined contribution pension schemes (same again).

Turning to my own profession for a moment, and looking on the Become an actuary part of the Institute and Faculty of Actuaries website, we find: Actuaries use their skills to help measure the probability and risk of future events. A little further on we find: It is essential that actuaries have excellent communication skills to enable them to communicate actuarial ideas to non-specialists in a way that meets the needs of the audience.

So, in a nutshell, producing risk information and then communicating it.

As a pensions actuary, I spent most of my time overseeing calculations which underpinned reports to clients which I would then summarise in presentations in order to get them to move a little bit further towards fully funding their pension schemes than where they were starting from. And then we had to condense the whole of that process into a single meeting where we tried to persuade the people who were actually doing the funding as part of the negotiation of the final deal. While, unconsciously, I am sure that just my presence was having some kind of placebo or nocebo effect, all of my conscious effort was directed on providing risk information and communicating it.

And actuaries are not alone in focusing on the provision of risk information as the most important element in guiding consumer behaviour. From the Financial Conduct Authority’s Retail Distribution Review, to the Pensions Advisory Service and Pension Wise, we are obsessed with it.

However if we are going to really change behaviour in response to the many risks these consumers face, we need to be spending much less time on producing risk information (which coincidentally may be done for us in the future by increasing capable machines anyway)and much more time focusing on the design of the financial environment we all operate within.

But if changing the environment is so much more effective for changing behaviour, perhaps what we need is a framework of standardised definitions to characterise any interventions we make. Fortunately the social scientists are way ahead of us on this and have produced just such a framework. TIPPME (typology of interventions in proximal physical micro-environments) has been developed and demonstrated by applying it to the selection, purchase and consumption of food, alcohol and tobacco. As the authors state: This provides a framework to reliably classify and describe, and enable more systematic design, reporting and analysis of, an important class of interventions. This then allows evidence to be collected into what works and what doesn’t in changing behaviour across populations.

Our physical health and what interventions cause us to look after it better are thought sufficiently important for a coordinated approach to designing the risk environment, rather than the piecemeal legislation and partial solutions offered by commercial providers we have had to date, to be worthwhile. I would suggest that our financial health needs to be given similar consideration. This looks like a promising way forward that could result in truly evidence-based financial regulation, with the prospect of lasting change to the way we help consumers navigate a path through the financial seas. Far away from the sharks.

 

The future for actuaries

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Daniel and Richard Susskind in their book “The Future of the Professions” set out two possible futures for the professions. Either:
• They carry on much as they have since the mid 19th century, but with the use of technology to streamline and optimise the way they work
• Increasingly capable machines will displace the work of current professionals

Their research suggests that, while these two futures will exist in parallel for some time, in the long run the second future will dominate. The actuarial profession is particularly vulnerable. As the Susskinds write:

Accountants and consultants, for example, are particularly effective at encroaching on the business of lawyers and actuaries.

Actuaries both here and in other countries are waking up to what is coming, but the response of the profession is a whole has been quite slow.

For the actuarial profession, we will see the extension of some trends which have already begun, eg:

  • Automation of processes not just leading to greater efficiencies but reconfiguring both what work is done and how it is done, eg propensity pricing and pensions valuations
  • Para professionalization, like CAA Global for instance
  • Globalisation
  • Specialisation
  • Mergers of businesses as markets consolidate
  • Flexible self employment

And the emergence of trends that have hardly started at all yet, eg:

  • The end of reserved roles for actuaries
  • Different ways of communicating advice (Richard Susskind got into trouble with the Law Society in the mid 1990s for suggesting that most legal communication between lawyers and their clients would be delivered via email in the future, which would strike us as an obvious observation now)
  • Online self-help for users of actuarial advice (ask discussed by the Pensions Policy Institute in their report last year)
  • The advance of roboactuaries and their assistants

Focusing on the last of these, a paper produced by Dodzi Attimu and Bryon Robidoux for the Society of Actuaries in July 2016 explored the theme of robo actuaries, by which they meant software that can perform the role of an actuary. They went on to elaborate as follows:

Though many actuaries would agree certain tasks can and should be automated, we are talking about more than that here. We mean a software system that can more or less autonomously perform the following activities: develop products, set assumptions, build models based on product and general risk specifications, develop and recommend investment and hedging strategies, generate memos to senior management, etc.

They then went on to define a robo actuarial analyst as:

A system that has limited cognitive abilities but can undertake specialized activities, e.g. perform the heavy lifting in model building (once the specification/configuration is created), perform portfolio optimization, generate reports including narratives (e.g. memos) based on data analysis, etc. When it comes to introducing AI to the actuarial profession, we believe the robo actuarial analyst would constitute the first wave and the robo actuary the second wave

They estimate that the first wave is 5 to 10 years away and the second 15 to 20 years away. We have been warned.

One of the implications of this would be far fewer actuarial students required and, in my view, a much smaller appetite amongst actuarial firms for employing students while they were sitting actuarial examinations, particularly the core rather than specialist ones. This in turn would suggest an expansion of the role of universities in supporting students through these stages of their actuarial education, massively increasing the IT and data analysis skills of the next generation of actuarial students and developing far more opportunities for students to develop skills more traditionally seen as “work-based”, such as presentation, project management and negotiation skills. Some universities, such as my own at the University of Leicester, are using the preparatory work in anticipation of the Institute and Faculty of Actuaries’ launch of Curriculum 2019 to do all of these things.

But universities and the education professionals in general face their own challenges from the rise of technology and increasingly capable machines:

  • The development of learning labs offering personalised learning systems
  • Online education networks, like Moodle, once used just to support traditional university teaching activities, but now starting to actively supplant them
  • Other online education platforms, like the Khan Academy
  • The rise of Massive Open Online Courses or MOOCs. For instance, more people have signed up to Harvard University’s MOOCs in one year than have enrolled at the University in its 377 year history

The actuarial profession and the higher education sector therefore need each other. We need to develop actuaries of the future coming into your firms to have:

  • great team working skills
  • highly developed presentation skills, both in writing and in speech
  • strong IT skills
  • clarity about why they are there and the desire to use their skills to solve problems

All within a system which is possible to regulate in a meaningful way. Developing such people for the actuarial profession will need to be a priority in the next few years.

Of course it is still possible to laugh at what Artificial Intelligence and Machine Learning (here and here) have not managed to do yet, despite their vast ambitions. But it should not blind us to the fact that those ambitions will be realised in our working lifetimes in many cases. And we need to start preparing now.