Pirates colourImagine a ship tossed around in a rough sea. The waves throw the vessel in all directions, before the sea level plummets sharply. Whirlpools have formed to the south of them and there are fears these will spread north and swallow the ship. The only means of escape is a rope ladder dangled above the ship, from an airship desperately being inflated above their heads. However the only place on the ship where this can be reached is the ship’s bridge, which is reserved for the ship’s officers.

Strangely the crew do not attempt to storm the bridge but seem resigned to their fate. Instead the captain orders the airship to dump several tons of ballast into the ship, pulling it even further down into the water. To all pleas for mercy from the crew his reply is the same: row harder. The captain has had the sail removed and passed up to the airship crew, on the understanding that the material will be made into a tow rope that will pull the ship to safety. But that seems like a long time ago. The crew have been left with no choice but to row, their daily rations gradually dwindling.

Question: if the sea level rises again, as of course it will eventually, so that the rope ladder moves into reach for everyone on the ship not too weak to take advantage of it, despite everything the ship’s officers have done to make the crew’s lives more hopeless, should we congratulate the ship’s captain on his stewardship? I and many others think not.

Meanwhile the head of a pin is drawing perilously close to the fabric of the airship as the crew pile heedlessly up the rope ladder…..

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Druids_celebrating_at_Stonehenge_(1)

Source: Creative Commons

An interesting article on solar cycles in this month’s Actuary magazine was spoilt for me by the attempt to smuggle in man made climate change denialist assertions within it. Brent Walker says that understanding the sun-climate connection requires a broadly similar skill set to that needed to become an actuary. Unfortunately, basic statistical literacy, the minimum which might be expected of an actuary, appears to be absent from his claim that there has been a pause in global warming despite soaring carbon dioxide levels in the atmosphere.

It is very difficult to construct downward trend curves from the average surface temperature data, but that does not seem to stop people, many of them funded by energy companies with much to gain if the need for green taxes could be successfully questioned, from trying.

It is rather like looking at the FTSE 100 graph and concluding that economic growth ended on 1 December 1999. Indeed the performance of equity markets provides more evidence to support this assertion than average temperature data does for the idea that global warming ended in 1997. And yet we don’t see people queuing up to say that economic growth doesn’t exist. Could it be because there would be no profits to be made from doing so?

This is not a good platform from which to make grandiose statements like “the profession should also be seriously questioning the outcomes of unreliable climate models that have been produced by scientists who, by and large, do not have an actuary’s ability to see the bigger risk picture”. I think, on the contrary, actuaries generally take their data sets from a much narrower range of sources than climate scientists (another summary of the evidence on solar cycles in global climate change, as discussed by Brent Walker but this time drawing opposite conclusions can be found here). This is usually because we are working to tight timescales to deliver advice.

Brent Walker is right when he says that actuaries need to consider the implications of climate science in their work, but the current scientific consensus is that solar cycles are not the main driver of climate change. A better place to start in my view would be the Institute and Faculty of Actuaries report Resource constraints: sharing a finite world which points out that, either through natural depletion or the need to ration resources to mitigate climate change in the future, the primary challenge of climate change will be to manage within much stricter limits both in terms of the resources we can use and the level of economic growth we can expect. That really is something actuaries can contribute to.

 

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When I started writing this blog in April, one of its main purposes was to highlight how poor we are at forecasting things, and suggest that our decision-making would improve if we acknowledged this fact. The best example I could find at the time to illustrate this point were the Office of Budget Responsibility (OBR) Gross Domestic Product (GDP) growth forecasts over the previous 3 years.

Eight months on it therefore feels like we have come full circle with the publication of the December 2013 OBR forecasts in conjunction with the Chancellor’s Autumn Statement. Little appears to have changed in the interim, the coloured lines on the chart below of their various forecasts now joined by the latest one all display similar shapes steadily moving to the right, advising extreme caution in framing any decision based on what the current crop of forecasts suggest.

OBR update

However, the worse the forecasts are revealed to be, the keener it seems politicians of all the three main parties are to base policy upon them. The Autumn Statement ran to 7,000 words, of which 18 were references to the OBR, with details of their forecasts taking up at least a quarter of the speech. In every area of economic policy, from economic growth to employment to government debt, it seemed that the starting point was what the OBR predicted on the subject. The Shadow Chancellor appears equally convinced that the OBR lends credibility to forecasting, pleading for Labour’s own tax and spending plans to be assessed by them in the run up to the next election.

I am a little mystified by all of this. The updated graph of the OBR’s performance since 2010 does not look any better than it did in April, the lines always go up in the future and so far they have always been wrong. If they turn out to be right (or, more likely, a bit less wrong) this time, then that does not seem to me to tell us anything much about their predictive skill. It takes great skill, as Les Dawson showed, to unerringly hit the wrong notes every time. It just takes average luck to hit them occasionally.

For another bit of crystal ball gazing in his Statement, the Chancellor abandoned the OBR to talk about state pension ages. These were going to go up to 68 by 2046. Now they are going to go up to 68 by the mid 2030s and then to 69 by the late 2040s. There will still be people alive now who were born when the state retirement age (for the “Old Age Pension” as it was then called) was 70. It looks like we are heading back in that direction again.

The State Pension Age (SPA) was introduced in 1908 as 70 years for men and women, when life expectancy at birth was below 55 for both. In 1925 it was reduced to 65, at which time life expectancy at birth had increased to 60.4 for women and 56.5 for men. In 1940, a SPA below life expectancy at birth was introduced for the first time, with women allowed to retire from age 60 despite a life expectancy of 63.5. Men, with a life expectancy of 58.2 years were still expected to continue working until they were 65. Male life expectancy at birth did not exceed SPA until 1948 (source: Human Mortality Database).

In 1995 the transition arrangements to put the SPA for women back up to 65 began, at which stage male life expectancy was 73.9 and female 79.2 years. In 2007 we all started the transition to a new SPA of 68. In 2011 this was speeded up and last week the destination was extended to 69.

SPAs

Where might it go next? If the OBR had a SPA modeller anything like their GDP modeller it would probably say up, in about another 2 years (just look again at the forecasts in the first graph to see what I mean). Ministers have hit the airwaves to say that the increasing SPA is a good news story, reflecting our increasingly long lives. And the life expectancies bear this out, with the 2011 figures showing life expectancy at birth for males at 78.8 and for females at 82.7, with all pension schemes and insurers building in further big increases to those life expectancies into their assumptions over the decades ahead.

And yet. The ONS statistical bulletin in September on healthy life expectancy at birth tells a different story which is not good news at all. Healthy life expectancies for men and women (ie the maximum age at which respondents would be expected to regard themselves as in good or very good health) at birth are only 63.2 and 64.2 years respectively. If people are going to have to drag themselves to work for 5 or 6 years on average in poor health before reaching SPA under current plans, how much further do we really expect SPA to increase?

Some have questioned the one size fits all nature of SPA, suggesting regional differences be introduced. If that ever happened, would we expect to see the mobile better off becoming SPA tourists, pushing up house prices in currently unfashionable corners of the country just as they have with their second homes in Devon and Cornwall? Perhaps. I certainly find it hard to imagine any state pension system which could keep up with the constantly mutating socioeconomics of the UK’s regions.

Perhaps a better approach would be a SPA calculated by HMRC with your tax code. Or some form of ill health early retirement option might be introduced to the state pension. What seems likely to me is that the pressures on the Government to mitigate the impact of a steadily increasing SPA will become one of the key intergenerational battlegrounds in the years ahead. In the meantime, those lines on the chart are going to get harder and harder for some.

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The consultation on the future shape of workplace pensions has been going on for nearly a month now and ends two weeks on Friday. It is littered with errors, from completely repeated questions (Q52 = Q54) to ones which are so similar as makes no difference (Qs 41 and 44 for example) and the thrust of a lot of the questions are quite hard to answer if you do not share some of the underlying assumptions of the DWP about the process, but come on! This is our chance to put a bit of definition into the rather blurry outline of a straw man which some of the newspapers have been tilting at so vigorously!

You don’t have to answer all of the questions, but just to goad you a bit I have done so here. Agree, disagree, I would love to hear from you. But not until you have responded to one of the following addresses:

How to respond to this consultation

Pleasesendyourconsultationresponses,preferablybye-mail,to:definedambition.pensionsconsultation@dwp.gsi.gov.uk

Or by post to:

Defined Ambition Team

Private Pensions Policy and Analysis

1st Floor, Caxton House

6-12 Tothill Street

London

SW1H 9NA

 

Feedback on the consultation process

There have only been 24 posts on the blog. I think the main reason for this was identified early in the process from a contributor referring to herself only as Hannah:

Hannah

I applaud the use of an open blog but it’s obvious that there’s a bit of a problem here! Perhaps, to avoid this becoming sidetracked, you could introduce a drop-down in the comment section so that people could select what aspect of DA reform or the consultation their comment relates to – and if their comment relates instead to concerns about their accrued benefits, you could redirect them to a separate specialised member queries page?

Reply

Sam Gilbert

Thanks for this Hannah, we will look into this once the blog picks up pace.

DA Team, DWP

Of course the blog never did pick up pace because people soon realised that there comments would be lost in a stream of pension benefit queries. Not the way to encourage a consultation. If you want to comment on this or anything else about the process of the consultation, the contact details are as follows:

Elias Koufou

DWP Consultation Coordinator

2nd Floor

Caxton House

Tothill Street

London

SW1H 9NA

Phone: 020 7449 7439

Email:elias.koufou@dwp.gsi.gov.uk

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