A possible manifesto for the next generation

06. December 2019 · Write a comment · Categories: Climate Change, Demographics, Economics

I am an actuary. I have worked for over 22 years either in, or serving in some capacity (apart from the two years I spent learning to be a teacher), the finance industry. I spent the 12 years before that mostly either bringing up children or writing unpublishable novels, with some early career experiences in the security printing industry thrown in which I thank principally for teaching me early that no way of doing things is for ever. Seven of my former employers no longer exist, mostly swallowed up in subsequent corporate transactions. I am increasingly convinced that a “career” like mine is no longer possible for the next generation, and my most recent evidence for this is based predominantly on two excellent books.

The first is The Finance Curse by Nicholas Shaxson. This demonstrates, convincingly, that a huge part of our current malaise as a nation, whether it is the loss of control over our own affairs, or the current, Victorian, levels of inequality or the fact that we don’t appear to invest in any of things we need to prosper as a society any more, can be traced back ultimately (sometimes via very cunning circuitous routes) to the Faustian pacts the City of London have lobbied the rest of us into with the rest of the world.

The second is The Pinch by David Willetts (and link to his slides – one of which is shown above – on it from 2015 here), whose central argument is that we are not attaching sufficient value to the claims of future generations, and that this is an intellectual failure of my generation: the one that spawned both me and Boris Johnson. I will declare an interest here: David is Chancellor at the University of Leicester, where I work as an actuarial science lecturer, in addition to all of his many other achievements and will be speaking at the Leicester Actuarial Science Society on 11 March on intergenerational fairness linked to a new edition of his book.

So for any highly talented twenty-somethings looking to make his or her mark in the world (and I have been privileged to meet and teach many of you over the last few years), I would, very hesitantly (because you probably don’t need me of all people to be giving you an agenda), suggest that the following things might be a priority for your generation:

  1. Don’t be distracted by the short term. Most people now want action on climate change, for instance, which has been delayed to a ridiculous extent by our inability to place sufficient value on the needs of future generations. Most of the things worth working towards and campaigning on are long-term problems with solutions which require long-term patient consensus-building. Our generation have been unable to do this seriously, yours cannot afford to be so distracted.
  2. Stay focused on the big issues: What is the proper allocation of wealth between the generations? Most of the problems we fixate on, like obesity or anti-social behaviour or credit card debt are just symptoms of the breakdown of the inter-generational contract which the baby boomers (because we felt that we could do so because of our greater numbers) have visited upon our societies. We have then presumed to pass moral judgement on the generation we have so comprehensively wronged, which is of course an easier message for many in our generation to hear but is one of the main reasons we have become too distracted to deal with the big long-term issues that we face as a society.
  3. Don’t make it all about good guys and bad guys. It is easy to vilify individuals in this great inter-generational psychodrama that we have all been living through, and it might make you feel momentarily more empowered or encouraged as a result, but in the long term the power is with you anyway and you will be more effective if you make it about good and bad systems. Good systems pursue the interests of our own people, whereas bad systems pursue the interests of people who need to be persuaded to invest in our society but have no real long term interest in doing so: ie other societies who clearly need to prioritise their own people’s needs and tax avoiding multinational companies and individuals.

I would like to finish with the concluding sentences of The Pinch:

The modern condition is supposed to be the search for meaning in a world where unreflective obligations to institutions or ways of doing things are eroded. The link between generations past, present and future is a source of meaning which is as natural as could be. It is both cultural and economic, personal and ethical. We must understand and honour those ties which bind the generations.

In the nine years since The Pinch was published we have done the very opposite of honouring the ties which bind the generations. We must hope that the generation following us have more wisdom.

Actuaries and the Green New Deal

20. September 2019 · Write a comment · Categories: Actuarial, Birmingham, Climate Change, Economics, Legal, Pensions, Regulation, Risk

Images from the Birmingham Climate Strike on 20 September 2019

On the day millions have taken to the streets across the globe to demand a more urgent response to the climate emergency, it seems a good time to write about the crossbench Decarbonisation and Economic Strategy Bill, originally tabled by Caroline Lucas and Clive Lewis in March this year, which has now been formally launched. This “Green New Deal Bill”, as it has been dubbed, sets out a legislative framework for the changes that are needed to make the Green New Deal (a programme of action neatly summarised in the Green New Deal Group’s fifth report here) a reality. The impacts of these proposals would be far-reaching and radical, changing the way our economy operates and what we value. As well as revolutionising the way we live, this would also significantly affect the current work of actuaries and provide many opportunities for people with the actuarial skill set to be centrally involved.

The main proposals which I think would impact actuaries are as follows:

  • Bring offshore capital back onshore to make sure that government, not markets, can make the big economic decisions. This would obviously impact all businesses operating in financial markets. There would also be large movements in the value of some businesses as a result of economic decisions which have previously been left to the market now being made by government. Modelling the impacts of such changes and helping businesses manage the transition are examples of where actuaries can add value here. We are already seeing increasing disinvestments from coal, but this would seem to be just the start of a much wider realignment (one possible view of the potential is discussed here).
  • Greater coordination between the Bank of England, the Treasury and the Debt Management Office. This means the end of the independence of the Bank of England by the look of it, with monetary policy and fiscal policy run in much closer cooperation with each other. It also means more regulation for banks and the supported emergence of local banks and a new national investment bank.
  • New bonds, nationally and locally, and new pension arrangements targeted at the green renewal of our infrastructure. For instance, tax rules on pension schemes could be changed to require a minimum percentage of assets invested in such bonds in order to continue to qualify for tax relief.
  • New objectives for business, and new kinds of businesses. For instance, the UK-based Corporate Accountability Network argues that the whole focus of corporate reporting will have to change, and so too then would corporate behaviour because there is very strong evidence that what is reported by any organisation is what becomes important to it. The Green New Deal Bill provides for changes to both company law and accounting to embrace the need for legally required and enforceable reporting on progress towards any company becoming carbon neutral. This will certainly lead to new business structures as a result and, I would imagine, many new business opportunities for those with actuarial skills as a result.
  • Replacing our measures of progress. This is something I have long supported. The main problem is that there are many possible candidates for this, but that also means that there is a great opportunity for actuaries to be involved in constructing appropriate indices which are globally respected, thereby helping to change what we value away from our current GDP and FTSE fixations.

Of course there are also opportunities for those with actuarial skills to block the transition to an economy that isn’t constructed in such a way as to make environmental destruction inevitable. Employers like these would probably make those with the actuarial skillset very lucrative offers to use their skills. I hope that most of us, and particularly those just at the start of their careers, will resist such offers. We now know that tobacco firms hid the evidence of the damage done by their products for decades and firms such as Exxon have done the same in denying the science on climate change for over 40 years. Please don’t be part of the problem when you could be such a valuable part of the solution.

At Leicester, we intend to launch a new module on our MSc Actuarial Science with Data Analytics programme next year, specifically on the ideas behind the Green New Deal and focusing on the areas where ideas still need to be developed (one of the most exciting things about the Green New Deal is that it is still an area of live discussion, with many of the policy details still being developed). I would welcome any input from members of the Green New Deal Group or those with research interests in this area who would be interested in helping us develop the detailed curriculum of this module before launch.

This is an exciting time for those who are comfortable working with data and communicating what they have found in it. Let’s make sure that those skills are applied to the needs of 99% of the global community.

Catch 22 and Actuarial Practice

03. August 2019 · Write a comment · Categories: Actuarial, Climate Change, Economics, Pensions, Regulation

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.

 

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

11. July 2019 · 1 comment · Categories: Actuarial, Defined Ambition, Legal, Pensions, Regulation

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.

Business macroeconomics for actuarial students – the first year

24. June 2019 · Write a comment · Categories: Actuarial, Economics

I have just finished teaching the Business Macroeconomics module on the BSc Mathematics and Actuarial Science programme at the University of Leicester for the first time, as part of our response to the Institute and Faculty of Actuaries’ (IFoA) Curriculum 2019 exercise, which has refreshed and in many cases entirely revamped what is expected to be learnt by actuarial students.

Actuarial students are not expected to be experts in economics, but they do need to know enough to be able to ask sensible questions and also to be aware of what is available to them from economics when tackling business problems. One stimulus for the revamp of the Business Economics subject by the IFoA was the general feeling that actuaries had, in some cases, been drawing on a narrower range of economic thought than needed to fully address all dimensions of the increasingly complex and multidisciplinary problems we face as a profession.

One of my key references when structuring the course (while not wanting to depart too far from Sloman, the source of most of the syllabus, in my first year of teaching it) was The Econocracy: The Perils of Leaving Economics to the Experts, by Joe Earle, Cahal Moran and Zach Ward-Perkins. As graduates from economics degrees themselves, they make a very convincing case for how economics as it is taught at university has little to do with the real world, often uncritically setting out a model based on rational individuals and an economic system that tends towards equilibrium. They advocate amongst other things the teaching of different schools of economics and also a greater focus on economic history. As the new IFoA syllabus had specifically added these last two points as part of the review, I felt encouraged that this was also criticism shared by the actuarial profession. Indeed, the Actuarial Research Centre of the IFoA have recently engaged Dr Iain Clacher on a project to understand how economics interacts with the actuarial profession, with the following initial conclusions:

  • The current regulatory environment may be counter-productive in some cases, particularly if it is based on too narrow an economics focus.
  • The much more quantitative approach to economics which has been dominant for the last 60 years or so may be pushing us towards a world where we think less.
  • There is scope for the actuarial profession to take much more from economics in trying to understand what is really going on.

One quote from The Econocracy which particularly struck me was:

It is hardly an exaggeration to say that it is now possible to go through an economics degree without once having to venture an opinion.

One of my objectives in teaching this module was therefore to change that, and to try and focus as much as possible on giving students the opportunity to develop opinions as they grapple with trying to understand what is really going on.

Have I succeeded? Well while it would not be true to say that I have been entirely successful, neither would it be accurate to say that I have not succeeded at all. I changed the examination from one where 80% of the marks were for multiple choice questions to one where only 16% were, with 60% devoted to four long questions requiring, at least in part, higher order skills of analysis and the ability to make an argument. The examination was 70% of the overall module mark, with 30% for a 3,000 word mini project which investigated whether the Office for National Statistics were correct in their proposal to re-designate student loans within the national accounts and asking students to comment with reasons on whether they agreed with the approach taken for valuing student loans for sale. And I broadened out the references within the course significantly, for example:

Amongst many many others.

Students found it tough at times, as some of the feedback I received made clear. Much of macroeconomics can be counter-intuitive, particularly for first year undergraduates. But those who engaged with the module definitely ventured opinions along the way! There was a lot of reading required, for much of which I provided more concise lecture notes, but there is plenty of scope for being more targeted next year in what we dig into in more detail. There will be less on the schools of thought at the beginning next time, as in my view it makes much more sense drawing this out as particular aspects of economic theory are being discussed – much better I think to work on the students’ comfort in group working initially, so as to get them discussing the subject more openly earlier. I also did not use the material built around the Core Project’s The Economy as much as I would have liked this time, although it was available to the students. I will be discussing how I can remedy this at the RES Nuffield Foundation Workshop: Teaching and Learning with CORE at the University of Warwick this week!

It has been a very stimulating experience and greatly increased my understanding of how actuaries have traditionally approached economics questions, while also allowing me to explore ways in which I would want those approaches to change. I look forward to Year Two!

Dr Strangelove’s Pension

01. May 2019 · Write a comment · Categories: Actuarial, Climate Change, Economics, Pensions, Prediction, Regulation, Risk

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

30. June 2018 · Write a comment · Categories: Actuarial, Economics, Legal, Prediction, Regulation

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?

14. May 2018 · Write a comment · Categories: Actuarial, Regulation

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

17. March 2018 · Write a comment · Categories: Actuarial, Defined Ambition, Pensions, Regulation, Risk, Uncategorized

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!

Bring Two Brains’ Hammer Inside the Tent

13. March 2018 · Write a comment · Categories: Cartoons, Economics, Pensions

 

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.

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