Augar, Climate Impact and Skill Shortages

31. July 2020 · Write a comment · Categories: Climate Change

I am just at the start of exploring the Green New Deal (GND), how it might work in the UK and its implications for the economy more generally. I have decided to start in an area I know a little bit about, namely education and skills, but three charts have stood out for me already in suggesting that a number of seemingly unrelated current problems may have very related solutions.

The first comes from the Augar Review into post 18 education and funding. The discussion around this when it came out in May 2019 was predominantly on the recommendations concerning increased funding for FE colleges and changes to the funding arrangements for universities. However there was a lot more to the Review than this and this chart was the most striking for me.

As you can see we hardly have any Level 4/5 as the highest level of qualification in England. What is Level 4/5? Well Level 3 means A levels, a BTEC Diploma or a craft qualification. Level 6 means a degree. In between are Levels 4 and 5. Level 5 is Foundation degrees, Higher National Diplomas (HNDs), Diplomas of Higher Education (DipHEs) and Level 4 is Higher National Certificates (HNCs), full Accounting Technician qualifications, etc.

As the Review says (my highlights in bold):

In England, only 4 per cent of 25 year-olds hold a Level 4 or Level 5 qualification as their highest level, compared to nearly 30 per cent for both Level 3 and Level 6. In contrast, in Germany, Level 4 and 5 makes up 20 per cent of all higher education enrolments.

Those few who do obtain a Level 4 or 5 award – often by a rather circuitous route – move into well-paid skilled jobs; the median annual income of someone with a Level 4 or 5 is around £2,000 higher than someone with a Level 3 by the age of 26 and comparable to the earnings of some graduates. Similarly…Level 3 apprenticeships in the skilled trades and engineering are very highly valued by employers – indeed in the latter case, for men at age 28, more than some Level 6 degrees. However…apprenticeship in England has in recent years been concentrated at lower levels (typically Level 2) than is common in the rest of Europe. Skill shortages in contrast are most evident at Levels 3 and above.

Employers have dealt with some skills shortages (for example in construction) by hiring recent immigrants with the relevant skills. They have also responded to the lack of Level 4 or 5 qualified applicants by taking on graduates as technicians, although without the relevant practical training graduates are often actually under-skilled for such roles and tend to leave quickly.

England’s education and training system currently stands in the way of taking on technician apprentices in emerging and small sectors. With no central mechanism for ensuring coverage, some employers have told us that it is often hard to identify colleges or other training providers willing to provide the necessary education and training. Providers will only do so if they are assured of a critical mass of apprentices, since otherwise the training is financially non-viable – especially if it requires expensive equipment.

The second chart or diagram comes from the paper called A net-zero emissions economic recovery from COVID-19 from the Oxford Smith School. This looks at the potential impact on reducing carbon emissions on the vertical axis and the long run multiplier (ie the increase in national income as a result of a stimulus to the economy). The obvious things to concentrate on in such a chart are those in the top right quadrant, ie high impact both environmentally and economically. The five areas unambiguously in this quadrant are Y (Clean research and development (R&D) spending), T (Clean energy infrastructure investment – ie alternatives to fossil fuels), S (Connectivity infrastructure, particularly broadband), X (General R&D spending) and L (Education investment).

And the final chart comes from the employer skills survey 2017 from the Department for Education in August 2018 (the latest one to emerge so far). This shows the vacancies due to there being insufficient people with the appropriate skills to fill them.

This should perhaps be considered in conjunction with the following very interesting comparison between the sectors where jobs are available and those where 17-18 year old typically would prefer to work (from Disconnected: Career aspirations and jobs in the UK by Chambers et al):

And this is before the big increases in skilled technicians in skilled trades, and in both scientific and technical areas and professional and managerial areas that a GND will require, coupled with the transformation of our economy as a result of the fourth industrial revolution that appears to be anticipated, at least in part, by the 17-18 year olds answering the survey. As the 2020 Progress Report to Parliament from the Committee on Climate Change on Reducing UK Emissions from last month says:

There are clear economic, social, and environmental benefits from immediate expansion of the following measures (again, my highlights in bold):

  • Investments in low-carbon and climate-resilient infrastructure.
  • Support for reskilling, retraining and research for a net-zero, climate-resilient economy.
  • Upgrades to our homes and other buildings ensuring they are fit for the future.
  • Action to make it easy for people to walk, cycle, and work remotely.
  • Tree planting, peatland restoration, green spaces and other green infrastructure.

Three different problems, all with a major part of their solution in the reconfiguration of our further and higher education systems to skill and reskill, train and retrain, the generations we are relying on to secure all our futures. It looks like a good place to start!

Not now Cato

24. May 2020 · Write a comment · Categories: Economics, Risk

Burt Kwouk and Peter Sellers in 1975’s The Return of the Pink Panther. Photograph: Allstar/ITC

Stephen Fry at the Hay Festival a few nights ago regaled us with many tales from his new book Troy. They were full of people making The Tough Decisions based on The Science or, as they tended to call it then, Prophecy. The seer Aesacus interpreted a dream about a flaming torch meaning Priam and Hecuba needed to kill the son Hecuba was carrying to stop him from bringing the destruction of Troy. Noone could bring themselves to kill the baby, who grew up to be Paris, and Troy was indeed destroyed. However rather than ignore The Science, they outsourced the deed, ultimately to the random wildlife roaming Mount Ida and so it never got done. Now my question would not be why they ignored The Science, but why they felt that The Science was something to be consulted with in secret with no second opinion and then enacted in a half-hearted way because they didn’t really believe it anyway. It’s almost as if there was no actual science in existence to give them an alternative.

One of the other interesting things Stephen said was in response to the question of whether there was value in students studying the classics at school. His very strongly argued case rested on two main points:

  • The value of learning stories made up not by a single writer but by a people; and
  • The greater level of understanding of much other art if you know “the second language” of the classics.

It is of course a highly elitist argument, but as a way of understanding an Elite which are currently following The Science in a direction they don’t really believe in, perhaps more relevant than it has ever been. Because if we are ruled by a group speaking in a second language and resistant to evidence-based policy perhaps we need to start acting accordingly.

Currently we are reading a lot in the media about how terrifyingly quickly Government debt is growing and how urgently we will need to cut Government spending once the pandemic is over, even on those key workers we have realised our (by any historical standards) fantastically rich economy cannot do without. I am thinking of the Institute of Fiscal Studies of course, the Adam Smith Institute and ultimately all arguments of this sort end up including the Cato Institute too. Now I could start to rebut these claims, pointing out that Government debt is not particularly big, that it is currently very cheap and that the last thing we will need for an economic recovery from it is austerity or whatever the Johnson Government decide to rebrand such a policy to make it politically acceptable.

But I am not going to waste my ink, particularly not now. One reason would be that there is an element of Jonathan Swift’s dictum at play here, ie:

Reasoning will never make a Man correct an ill Opinion, which by Reasoning he never acquired.

But another, in my view much more powerful, reason is that we are pretty universally experiencing a trauma which has triggered fight, flight or freeze responses that have impaired our thought processes quite significantly. As Joanne Stubley from the Tavistock and Portman NHS Foundation Trust puts it so well:

Whilst the wish to be involved and to contribute clearly may have altruistic, reparative aims inherent in it, there is also a growing sense of competition that is emerging – competition for who is the expert, who will lead the research, the clinical pathways mapping or write the best paper on Covid 19. This jostling for position may be fuelled by survival anxieties both in relation to the threat of the virus (life and death anxieties that propel us to action) but perhaps also anxiety for what will occur when the threat has passed. We have lived with the reality of austerity in the NHS for many years, and services have become accustomed to the competition inherent in the marketplace economy. With the threat of serious economic downturn and recession looming, this causes further anxiety in relation to the long-term viability of services. Holding in mind a compassionate, thoughtful position that allows for cooperation becomes so much more difficult when this part of the brain is turned down when under threat – survival in the immediate threat does not make use of this more sophisticated mode of thought and behaviour.

Put simply, we don’t know what we are experiencing yet. It is too soon to say on almost any level. If someone is giving you a prognosis on what will happen economically under different exit strategies from Lockdown then they do not yet have the data to know what they are talking about. Noone does. The best thing that science (as opposed to The Science) can tell us currently is that we don’t know.

So we don’t know and we can’t think. We therefore need to be very cautious about what we do next.

 

Let’s stop worrying about “damaging” GDP and transfer risks back to where they belong

30. March 2020 · Write a comment · Categories: Actuarial, Climate Change, Economics, Prediction, Risk

“We won’t go back to normal, because ‘the normal’ was the problem.”

For me the turning point came on 12 March, when the FTSE 100 fell by 639 points or around 11% of its value in one day. What were the newspaper headlines that day?

Only the Times and the Financial Times had the stock market fall on their front page at all. Everyone else led with some variant on the Prime Minister saying that many families would lose loved ones. The attention switch was so complete that when KPMG published their UK Economic Outlook for March 2020 the following week – forecasting a main scenario for Gross Domestic Product (GDP) in the UK to fall by 2.6% in 2020 then grow by 1.7% in 2021, and a downside scenario for GDP to contract by 5.4% in 2020 and by another 1.4% in 2021, representing a slightly more severe recession than the downturn experienced in 2008-09 – nobody noticed that either (19 March and 20 March headlines here and here respectively), sandwiched as it was between the announcement that schools were to close and the Prime Minister saying that we had 12 weeks to turn the tide.

KPMG’s report was an example of damage function modelling of course: trying to model changes in economic activity due to some phenomenon and summarising that change in terms of a change in GDP. I have recently been quite exercised by similar considerations with regard to climate change damage functions and the inconsistencies of the ones in most current use with climate science. However it has become increasingly clear to me that I may have been missing the point. I realise I was focusing on damage functions because I felt they were leading to extreme optimism in the modelling of the impact of climate change on our economies and that it was this link which was most likely to get the attention of policymakers (and other actuaries!).

But of course GDP is only ever a proxy for some of the things we regard as important, rather than something that is important in itself, and a flawed one too. As Diane Coyle’s excellent book, GDP: A Brief But Affectionate History, makes clear. Its problems include:

  • It under-records growth by failing to capture fully the increase in the range of products in the economy;
  • It becomes a worse measure as the world economy consists less and less of material items, eg online activities; and
  • It can show positive growth caused by clearly unsustainable practices and those which deplete natural resources.

When KMPG released their economic outlook, it was as if they were trying to drag a weary world population away from the windows and balconies from which they are still trying to connect with each other and what is still real in the world back to the Monopoly game that they have set up in the front room.

It took a lot to get our behaviour to follow this change in attention. When Wuhan went into lockdown on 23 January, I was talking to Stuart McDonald, now a member of the COVID-19 Actuaries Response Group, about the talk he was planning to do at the University of Leicester on 18 March and deciding he would probably need to add a few slides about coronavirus. Italy went into lockdown on 9 March and yet on 12 March we had a second call where we still felt on balance that it might go ahead as long as we took sensible precautions, but by this time it was almost entirely about getting accurate messaging out about COVID-19. We called it off the following day. The UK finally went into lockdown on 23 March.

So perhaps it is no wonder that we have so far been unable to change human behaviour to anything like the same extent in response to climate change, which is a bit like COVID-19 in slow motion, progressing unseen with each stage of its development effectively locking us into the next steps in its relentless escalation. In the same way that movement restrictions may not slow down the increase in new cases for perhaps around a week, stopping carbon emissions now would still see us locked into further warming for 40 years. And even with the greater immediacy of coronavirus, it has only been when we have decided we care more about saving each other than maintaining our GDP that real progress has become possible.

My view is that some things that must be different post COVID are already clear. I think as a society we are going to demand more resilience, for example:

  • Resilience of our health service – this means much higher levels of spending, building deliberate over-capacity into the system in normal times;
  • Resilience of our food supplies, for example strengthening domestic supply chains;
  • Resilience of our population, so that we do not have 1.6 million food parcels needing to be given out in a year by the Trussell Trust, in the absence of a pandemic, for instance; and
  • Resilience of our infrastructure – to everything from floods to banking crises to pandemics to storms and heatwaves.

The Institute and Faculty of Actuaries (IFoA) has therefore shown great timing in its launch of its 2020 thought leadership campaign The Great Risk Transfer. The campaign aims to examine the trend of the transfer of risk from institutions to individuals, and how people can be better equipped to manage the financial risks they now face. I think the campaign rightly highlights the fact that risk transfer is all one way, but it clearly also goes way beyond the finance sector. Rail franchises never took on any real risk, it appears, even before the pandemic. Nor have PFI contracts, despite the price tag. By contrast the incremental removal of risk pooling by corporations for their employees and/or government for their citizens over the last 40 years has been relentless and in one direction only.

As Andrew Simms, one of the Green New Deal Group, said on Twitter yesterday about taking lessons for the climate emergency from the pandemic crisis:

Those roads with a fraction of the traffic, the drop in aviation, the economic shift to put public health & well-being first, the speed with which the brain adapts to the new normal: as someone said, these things are a postcard from the future we need to get to. Let’s take notes.

Avoiding mean observances of paltry decorum

21. March 2020 · Write a comment · Categories: Actuarial, Regulation

CPD doesn’t have to feel like this: a youthful man-o’-warsman, from the diary of an English lad who served in the British frigate Macedonian during her memorable action with the American frigate United States; who afterward deserted. Source: https://www.flickr.com/photos/internetarchivebookimages/14594689439/

According to Daniel and Richard Susskind’s the Future of the Professions, there is a Grand Bargain between society and the professions, which means (and I am paraphrasing a little here), in return for professions providing:

  • Expertise, experience and judgement;
  • Delivered affordably, accessibly, reassuringly and reliably;
  • With knowledge and methods maintained and kept up to date, members trained, standards and quality of work enforced and only appropriately qualified individuals allowed in;
  • Acting honestly and in good faith; and
  • Putting clients interests ahead of their own.

Society will give the professions:

  • Respect and status;
  • Exclusive rights to perform/provide socially significant activities or services; and
  • Independence to decide how they do it and how much they can be paid for it.

It is with regard to the knowledge and methods point above that nearly all professions have some sort of continuing professional development (CPD) requirement. The Institute and Faculty of Actuaries (IFoA) consultation on their proposed new CPD scheme is currently open and runs until 17 April. I will be responding to it via the online questionnaire, but thought it might be worth airing a few points more widely too, to promote some discussion just in case anyone has any bandwidth for anything not directly corona-related at the moment.

Overall I think this is a move very definitely in the right direction. I have some criticisms, which I will come to, but I very much welcome:

  • the broadening of the scope of CPD activities. I am clearly not the only one who has experienced a talk or discussion or even an arts event about which I would have said, in the words of Walter Scott: One hour of life, crowded to the full with glorious action, and filled with noble risks, is worth whole years of those mean observances of paltry decorum, in which men steal through existence, like sluggish waters through a marsh, without either honour or observation. And yet would have been unable to record it in my CPD because there was no other actuary present and no way of proving I was there!
  • the introduction of reflective practice discussions. There are few details about how these will work and who will run them (the suggestion I took from the consultation was that they would be centrally run, which I think would be a mistake for reasons I will explain below). However in principle this is a great idea, getting people together to talk about what they are doing to develop their thinking in important areas and sharing their experiences on how the journey is going. I am not aware of any other profession moving in this direction currently, but I very much welcome it.
  • The removal of the need to be audited annually on CPD recorded. The 2018 Annual Report of the Disciplinary Board of the Institute and Faculty of Actuaries indicates that there were 2 cases of non-compliance with CPD referred to them and 3 cases of failure to hold a practising certificate. The current system therefore does bring the words sledgehammer and nut to mind.

However I do also have some criticisms:

  • there is much made of how they are proposing to prescribe a single requirement for all members. I found it difficult to answer whether I agreed or disagreed with this proposal as I didn’t feel that they had: people who work for firms who have signed up to the profession’s Quality Assurance Scheme (QAS), practising certificate holders, Practising Members (we will come to these), Non-Practising Members and students all have different rules applying to them. My concern here is that this 5 tier system will translate into inequalities of status within the profession, and some members having a louder voice than others.
  • keeping students (completely outside the CPD system via the Personal and Professional Development (PPD) scheme) and QAS members completely dependent upon their firms for professional development risks, in my view, narrowing the development undertaken rather than the broadening that the proposals overall intend.
  • I am very concerned about the examples given to clarify what is meant by a Non-Practising Member: retired from actuarial practice; not carrying out technical actuarial work; or on a career break. As technical actuarial work is not defined in the consultation, the suspicion is that this will be the usual suspects of life, general insurance, finance and investment and pensions, with wider fields including the education field where I practise, certainly NED roles but also perhaps resources and environment work or, particularly topical at the moment, health and care. Obviously members may choose not to apply for non-practising status, but I do not believe that they should have the option to if they are using their judgement to analyse complex situations to help the people or organisations they are working with to make decisions.
  • currently most categories of member need to complete 2 hours annually of Professional Skills Training (PST). The materials provided by the profession to support members in complying with this requirement are extensive and excellent, but there are a wide range of ways in which it is currently met, from company events to regional community events to individuals registering the video and other content they have interacted with online. In my view this allows members to tailor what they think they need in a given year and, as a provider of these sessions for a number of years now, I have been impressed by the open and frank discussions which have become possible with our attendees on difficult questions involving potential reputational risk. My main concern with the proposals on this are that members will not feel the need to subject themselves to these sessions if the professional skills requirements are to be relaxed as far as just a learning outcome related to managing professional ethical challenges.
  • I am enthusiastic about the replacement of the audit of CPD records with an invitation to a reflective practice session instead, however I would be concerned if these were all centrally controlled, as opposed to the wide range of current providers for PST. I well remember sitting in professionalism CPD sessions run by senior members of the IFoA in a room full of other scheme actuaries and none of us prepared to admit to making any mistakes in our client work in front of each other. It would be regrettable if these sessions became formalised to the point that they were no longer useful.
  • my final point is that, if we are moving from a strictly audited system to one which will be much more light touch, perhaps this is also an opportunity to increase the hours from the current 30 hours for practising certificate holders and 15 for nearly everyone else. Doing a quick check I found that the Society of Actuaries requires 50 hours over 2 years; and the General Medical Council requires 250 hours over 5 years. At the other end of the scale, the Institute of Chartered Accounts in England and Wales (ICAEW) and the Law Society have no specific requirements at all. The ICAEW, hilariously in my view, includes the following in its guidance: There is no requirement to achieve a certain number of hours or points, and the notion of structured and unstructured activities no longer exists. There is no requirement to attend a certain number of courses or seminars. There may be periods when, having reflected, you quite reasonably conclude that you already have all the current skills and knowledge necessary for your work and that you do not need to undertake any further CPD activity at that moment. However, if we believe, as I do, that our work has never been so technical nor demanded a wider range of skills, many of which have not been traditionally demanded of actuaries previously, we should surely require that we move closer to the top of this range.

CPD has a range of uses beyond meeting the Susskind’s grand bargain:

  • it allows us to share our practice with each other and challenge each other;
  • it allows us to move between practice areas or respond to new ideas in our existing ones;
  • it is a means for the profession to disseminate urgent changes in expectations of members (in conjunction with the alerts which are issued occasionally);
  • but, perhaps most importantly, it allows us as individuals to reflect on what we are doing and the direction we are taking and consider whether we might want to change either of these.

Carefully chosen, it really can spare us a system of Scott’s mean observances of paltry decorum and instead provide more hours of glorious action!

Actuaries and the Event Horizon

18. January 2020 · Write a comment · Categories: Actuarial, Climate Change, Economics

Credit:ESO, ESA/Hubble, M. Kornmesser Information extracted from IPTC Photo Metadata: This artist’s impression depicts a Sun-like star close to a rapidly spinning supermassive black hole, with a mass of about 100 million times the mass of the Sun, in the centre of a distant galaxy. Its large mass bends the light from stars and gas behind it. Despite being much more massive than the star, the supermassive black hole has an event horizon which is only 200 times larger than the size of the star. Its fast rotation has changed its shape into an oblate sphere. The gravitational pull of the supermassive black hole rips the the star apart in a tidal disruption event. In the process, the star was “spaghettified” and shocks in the colliding debris as well as heat generated in accretion led to a burst of light.

We all know the concept of an event horizon. It is the point where you move past a point of no return without realising it, as David Finkelstein theorised in 1958 would happen as you approached a black hole. Steve Keen has set out why we may have done precisely the same thing with the climate here. The language is a little fruity in places (but justifiably so, in my view, to differentiate between serious economic research and the rubbish which Nordhaus and others have polluted the field of the economics of climate change with, the first 25 minutes gives you the general idea).

What should actuaries do in an event horizon situation? Well in some ways it depends on the political climate you are working in. Can anyone imagine an equivalent of Donald Trump saying that he didn’t believe in black holes and that spaghettification was invented by Italy to support their pasta industry? This probably doesn’t seem as ridiculous as it would have done only a few years ago, which demonstrates how the political environment has changed.

What actuaries have to do in an event horizon situation, in my view, is not to give up. That means:

  • pushing clients hard towards decarbonisation as quickly as possible; and
  • offering people investment opportunities which are part of the solution rather than the problem (the FT has pointed out that there is a proliferation of green funds, however Richard Murphy (one of the Green New Deal group) and others have pointed out that there is no way currently of knowing which if these funds are truly green – actuaries could play a leading role in accrediting funds to help with this.

Steve Keen is very pessimistic about the possibilities of a Green New Deal to meet the need to keep warming below 2 degrees above pre-industrial levels. And there are many that believe that you cannot decouple economic growth from carbon emissions. But they may be wrong, and in my view it is worth pursuing the restructuring of our economy which would be required to deliver it, if only to reduce the level of carbon rationing that will be required otherwise within our lifetimes. We do not have a Government which is remotely interested in this in power at the moment, so following this path comes with considerable professional risks, particularly when short term knee jerk policies to deal with currently failing companies (eg FlyBe) are going to be dominating the headlines, with even more to follow once the long-term realities of Brexit become apparent after 31 January. Another event horizon it would seem.

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!

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