Regulation – Page 3 – We Know Zero

Chartered Actuary: I am still very confident that this is a good idea

07. September 2022 · 6 comments · Categories: Actuarial, Cartoons, Professions, Regulation, Risk

I originally talked about Chartered Actuary status (here, with the cartoon above) when the Institute and Faculty of Actuaries (IFoA) first proposed the idea and set up a consultation in 2018. I said then that sometimes an idea comes along that seems so obviously good that you wonder why it hasn’t been done a long time ago.

Four years on from the retreat from the proposal following the slenderest of straw polls offering some challenge, and it remains a good idea. There are still relatively few full actuarial roles available for associates and many firms still assuming a default career path of continuing to fellowship.

There are some differences this time however:

There will be two chartered actuary designations: Chartered Actuary (Fellow) and Chartered Actuary (Associate), with the hope that the FIAs who were most concerned with maintaining their distance from AIAs last time will now support the proposal. The original proposal suggested Chartered Actuary (CAct) would be a single distinct qualification, a required qualification point for all student actuaries to reach before going any further and globally recognised as the generalist actuarial qualification from the IFoA. This approach has been abandoned, with no requirement to complete the core curriculum before tackling specialist modules. It will be interesting to see whether Chartered Actuary (Associate) will be seen as a destination in its own right, or just a change of letters. This will depend on all of us within the profession (see below).
The environment we are operating in has certainly changed, with the replacement of our regulator, the FRC, by the Audit, Reporting and Governance Authority (ARGA). One of the concerns that the IFoA were looking to address in 2018 was that another, much larger, profession, could pose an existential threat. If actuaries have a unique skill set, which is likely to be lost to a wide range of businesses and other sectors if it is unable to meet the demand for those skills due to a simple lack of numbers, then the need to take any perceived barrier to practise away from our emerging young professionals is clear. The move from FRC to ARGA does not remove this threat and there also remains in the regulatory proposals to date the threat of differential regulation, where actuaries are regulated more heavily than other professionals doing similar work could price us out of markets where we have value to add. The profession therefore needs to grow to increase our voice and influence over the future regulation of the profession.
We have acknowledged the impact of the Great Risk Transfer within the finance sector, but in my view the impacts more generally of the increased individual risks and uncertainties millions of the UK population face as energy, food and housing costs escalate need to be faced up to by our profession. For that we need to continue to be a destination of choice for a growing number of your people with a widening range of backgrounds and experiences.

So what do we need to do to make this a change worth making? We need 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. A good place to start might be the IFoA’s own website, where the Route to Becoming An Actuary still features a diagram where an IFoA Associate is shown as a milestone on the way to the final destination of becoming a Fellow.

Some Don’t Like It Hot

21. July 2022 · Write a comment · Categories: Climate Change, Regulation

Levels of body temperatures at which extreme hot and cold sensors are triggered – data source: An Immense World – Ed Yong

In January this year, the southern hemisphere experienced, in some cases, record-breaking heatwaves, with temperatures reaching 50.7° C in Western Australia. In the last few weeks, it has been the turn of the northern hemisphere.

In the UK this week, we recorded the highest day (40.3° C in Coningsby in Lincolnshire) and night (25.8° C in Kenley in Surrey) temperatures ever. What is clear is that climate change has already significantly changed the probabilities of extreme weather events occurring in the UK, meaning that our own past experiences of weather ranges and likelihoods are now out of date.

This is likely to have many consequences. This week our railways literally went into meltdown in places, with New Street operating an “exit only” policy for a period while no trains were running to or from the station at all. Overhead cables were damaged, requiring lengthy repair work and buckling rails led to widespread speed restrictions across the network. This is because the heat tolerances of our railway system were set in cooler times, meaning that most of the network can operate up to around 46° C. As track temperatures can be up to 20° hotter than air temperatures, this threshold was widely exceeded.

So, if our infrastructure has limits, what about life on the planet? Well yes, in animals these are controlled by proteins called TRP channels, which allow neurons to be stimulated at temperatures which would be immediately extremely harmful to the organisms concerned. A few of these are shown above. In humans, this is a body temperature of around 42° C (a healthy temperature is around 37° C and our bodies work hard to keep it there, but we starts to feel unwell from 37.8° C upwards and may become comatose at 42° C. We are likely to die or at least suffer serious brain damage at 43° C), but the hot and cold limits vary hugely between different species. So rapid changes in the temperature distributions means that habitable areas, which would need to be at temperatures well short of these limits, for a wide range of animals and plants will also be changing rapidly, requiring migration or extinction for many.

In humans, where we have more control over our environments, we will still need to adapt many of our practices, from how we construct our infrastructure, to how we use resources and spend our time. One obvious question that has come up this week is why we don’t have a maximum workplace temperature (currently we don’t have a minimum either, although we do have guidance around minimum temperatures). The House of Commons Library Briefing Note on this from 2010 can be found here.

In Germany, a maximum of 26°C is the norm but the guidelines state that, if the outside temperature is higher, a workplace temperature may in certain circumstances be higher than 26°C.

In Spain, Real Decreto 486 of 1997 lays down that, in places where sedentary work takes place, the temperature should be between 17 and 27°C. In places of light physical work, an acceptable temperature will be between 14 and 25°C, although there are some limitations and conditions around these requirements.

There are clearly complications around setting a maximum comfort level which would probably also need to account for humidity and activity, but the Health and Safety Executive have suggested 30° C in their guidance as a maximum acceptable temperature, less if the work is strenuous. They also suggest polling employees to see if a particular temperature is comfortable, making adjustments if more than 10% are uncomfortable in an air-conditioned office.

There are now renewed calls to introduce a maximum workplace temperature in law. And, as Lord Turner so eloquently put it on Sky News, this is at only 1.2°C warming. If all of the promises made at Glasgow are kept we may stay between 1.8°C and 2.5°C. However in the UK, the Climate Change Committee, the body set up specifically to monitor our compliance with our climate commitments, has already said that our current programmes will not deliver net zero. And Liz Truss, who may be Prime Minister in 6 weeks, has vowed to halt the only green levies we have so far been able to put into law.

In the meantime, it appears to be a great time to be a Melanophila, or fire-chasing, beetle.

What Stuart Kirk was not criticised for and what this tells us about financial markets

01. July 2022 · Write a comment · Categories: Climate Change, Economics, Regulation, Risk, Science Fiction

For those of you totally immersed in the daily to and fro of the finance industry, this post about Stuart Kirk will probably seem a little late in the day. For those of you who are not, let me explain briefly what I am talking about today!

Stuart Kirk was Global Head of Responsible Investments at HSBC Asset Management. On 19 May 2022 he gave a talk at the FT Live Moral Money Summit Europe conference with the provocative title of Why investors need not worry about climate risk. Stuart’s talk was a real crowd splitter. Many called for his dismissal (HSBC subsequently suspended him), others regarded his talk as a missed opportunity and full of things which were not true, while others have regarded his stance as speaking truth to power.

However what interests me most about all of the column inches devoted to the affair is what he has not been criticised for and what this tells us about financial markets.

What Stuart said was structured around the following 12 statements:

Unsubstantiated, shrill, partisan, self-serving, apocalyptic warnings are ALWAYS wrong.
As the warnings became ever graver, the more asset prices INCREASED in value.
One of only three explanations can explain the impending end of the world and higher risk asset prices:
1. Climate risk is negligible.
2. Climate risk is already in the price.
3. All investors are wrong.
Even by the UN IPCC own numbers, climate change will have a negligible effect on the world economy – A (large) temperature rise of 3.6 degrees by 2100 means a loss of 2.6 per cent o global GDP. Let’s assume 5%.
Adaption is cheap and effective: climate related costs relative to GDP and mortality rates are down.
Perhaps the biggest error of thinking with climate risk is confusing volumes and values – Plenty of things happen between a volume disruption and a move in asset values.
Climate “winners” and losers” can create value. Climate “winners” and “losers” can destroy value.
The difference between volumes and value is regularly made clear in markets.
Even if climate risk isn’t negligible, it’s too far into the future to matter for most companies.
To make climate change appear like a significant threat, scaremongers are torturing their models.
It’s easy to show that climate change is an investment risk if you engineer a bond market collapse.
Climate change isn’t a long-run risk just like wars, energy crises, pandemics, financial crises and so on (with the graphs shown above to supposedly prove this point).

Can you spot the pattern here? All of these statements are about the map that Stuart is standing in (think of Joey standing in his map to orientate himself in Friends). It is a complicated map of asset prices and charts and reports written by lots of other people standing in the map with Stuart, but it is still just a map. And the map is the territory as far as Stuart is concerned. If something does not appear in his map, it is not worth worrying about. And climate risk is struggling to make it into his map. In Stuart’s view, this is a problem for climate risk, and the people “torturing” their models to make climate risk appear significant and piling him up with regulatory reporting responsibilities are very annoying.

But of course this take is completely upside down. This is not a problem for climate risk. Rather climate risk is a problem for us and the fact that it does not appear in our models unless we torture them (which I am sure is true) means that we have the wrong models. Because the scientific consensus about the consequences of climate change on our current trajectory of between 3 and 4 degrees warming are (amongst others from Mark Lynas’ Six Degrees: Our Future on a Hotter Planet):

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].

Much of the discussion about the talk was that Stuart was speaking out bravely and that HSBC had only suspended him to silence inconvenient truths, that he had been silenced by “extreme environmental ideology“. I have no idea about all of the reasons why HSBC suspended Stuart other than their official statements, but it seems clear to me that many people in the finance industry agree with what he said. This suggests to me an extreme ideology of its own of resolutely refusing to look out of the window.

In Kim Stanley Robinson’s excellent New York 2140, global sea levels have risen by 50 feet. Everyone lives in tower blocks connected by sky bridges which occasionally topple into the canals which were once streets. I used to think that money markets would not survive events like this, but Robinson posits what I believe is a more likely future scenario. The Intertidal Property Pricing Index is developed instead, carefully constructed to be reasonably stable despite the instability of the actual real estate being valued, and people bet on it. And soon everyone is fixated on what this index is saying daily rather than the buildings collapsing around them.

This is exactly what our finance sector will do of course, there will be money to be made out of such activities after all. And so expectations that they will, in any way, be a leader out of the climate emergency are, in my view, unrealistic.

We will however need the finance industry to facilitate aspects of how we transform our economies over the next 10 to 20 years. And this will involve much more of the regulation which annoys Stuart and others so much.

A success made of failures

13. March 2021 · Write a comment · Categories: Climate Change, Economics, Prediction, Regulation, Risk, Science Fiction

Source: Wikimedia Commons: Shattered right-hand side mirror on a 5-series BMW in Durham, North Carolina by Ildar Sagdejev. Cropped by Nick Foster

It starts in 2025 with a description of a horrific heatwave in India which will stay with me for a very long time. As well it should as, in the book, it kills 20 million people. In response, India send thousands of aircraft up to 60,000 feet to spray aerosol particulates of sulphur dioxide into the stratosphere, in defiance of the international conventions banning such activities, to deflect some of the solar radiation with the aim of reducing the probability of future heatwaves for a period. By how much or for how long or with what other consequences is unknown.

As we build up to COP26 in Glasgow in November this year, in the book we start with the results of COP29 in Bogota, where the organisation which would come to be known as The Ministry for the Future (and the title of the book by Kim Stanley Robinson) was set up “to advocate for the world’s future generations of citizens, whose rights, as defined in the Universal Declaration of Human Rights, are as valid as our own. This new Subsidiary Body is furthermore charged with defending all living creatures present and future who cannot speak for themselves, by promoting their legal standing and physical protection.”

The Indian crisis happens a few months later. The new head of this body, Mary Murphy, is briefly held captive by, Frank, one of the survivors of the heatwave in her own flat in Zurich (the book also feels like a love letter to Zurich) and challenged to do more:

It’s not enough. Your efforts aren’t slowing the damage fast enough. They aren’t creating fixes fast enough. You can see that, because everyone can see it. Things don’t change, we’re still on track for a mass extinction event, we’re in the extinctions already. That’s what I mean by not enough. So why don’t you do something more?

This has a profound impact on Mary, who keeps in touch with Frank and his troubled suffering life throughout the book. It also leans her towards effectively endorsing the involvement of her No 2 in “black” operations to ensure certain people are “scared away from burning carbon”.

Indeed the book is suffused with eco-terrorism. Technological progress has partly displaced the state monopoly of violence, with drone technology in particular meaning that no aircraft or ship or surface navy is safe from a well-enough organised group by the end of the book. People stop flying when aircraft start being shot down regularly, and those that still do fly use carbon-negative airships, where solar panels generate more power than the ships use. Davos attendees get taken hostage and given a compulsory seminar at one point. Tax havens become obsolete when all money becomes digital and tracked.

Mary’s interactions with central bankers are probably the closest this book ever comes to comedy. In the first, she tries to argue for a “carbon coin”, a digital currency which would be paid out to organisations and people who could prove they had removed carbon from the environment. This would be the incentive to work alongside the carbon taxes. The contemptuous response from the Federal Reserve and others at first is “not our purview”, however by the end they are on board with this and many of the other ideas developed along the way.

There are so many ideas in this book, far too many to cover them all here: some of them familiar to me from economics (carbon quantitative easing, Jevons’ Paradox, Modern Monetary Theory, Gini Coefficient – these each get a short chapter among many other ideas and interspersed with riddles) and others not so. The Indian techno fix is the first of many: some successful, like sucking out the meltwater under glaciers to slow them sliding into the ocean and others not so, like the billionaire wanting to refreeze the oceans. Russia dyes parts of the Arctic yellow to reflect more sunlight back. Huge areas of land are rewilded.

What strikes me most is that the arguments we tend to have here and now about which course to take (Freud’s phrase is quoted here in the book – “the narcissism of small differences”) seem largely moot in this one imagined near-future: all of them are tried there – it’s not techno-fixes or de-carbonisation of transport and heating, it’s both. It’s not carbon QE or re-wilding, it’s both. If something doesn’t work, it’s abandoned. By far the most important determinant of which of the IPCC future scenarios we end up on seems to be how quickly we start. Economists come in for particular ridicule there – whatever course of action is planned, they can find one group who thinks it will have one effect, one who think it will have the opposite effect and one which thinks it will make no difference at all. The difference is that the economists are no longer guiding policy there, but facilitating and post hoc rationalising it.

There is a wartime feel to the book throughout, with people doing what they feel needs to be done in desperate circumstances. The choices are all different levels of bad, but bad is almost incalculably better than worst. And the overall impression is of a world changing rapidly, with one of its herd animals belatedly getting into better balance with the others. Even at 560 odd pages the impressions are inevitably just that – one chapter is just a list of different organisations working on aspects of the climate emergency in different countries, described as about 1% of the total number active. It is like the shards of a smashed wing mirror picking out details from the vanishing world behind. I have never wanted to apply the word polymesmeric (which I first saw on the cover of Catch 22 by Joseph Heller) to a book as much as I have to this one.

The hoped-for outcome of all of this? In one conversation this is described as a “success made of failures” or a “cobbling-together from less-than-satisfactory parts”, which I think sums it up nicely.

And I definitely want to visit Zurich one day. Probably by airship.

Getting Serious About Miracles

17. January 2021 · Write a comment · Categories: Prediction, Regulation, Risk

There are many papers about model risk, and the dangers of blindly relying on algorithms or metrics without allowing for human judgement at any point in any subsequent analysis (in effect “baking in” whatever analysis was done at the time the computer model or algorithm was constructed as the final word), but these can often descend into the same level of technical impenetrability as the programmes they are attempting to critique.

I watched the film Sully: Miracle on the Hudson for the first time this week, on the anniversary of the landing on the Hudson. In the final scenes there is a hearing (spoiler alert!), where the evidence presented up until that point based on computer simulations, with and without pilots involved, was leading to the unanimous conclusion that Sully and Skiles could have turned back to La Guardia or Teterboro airports rather than landing on the Hudson River in January. However Sully had appealed to have the video recordings of the pilot simulations shown to the hearing, and these revealed the pilots responding to the catastrophic bird strikes which had taken out both engines (again something later confirmed when the actual engines were recovered, but which the simulations themselves did not accept because of the instrument readings on one of the engines from the aircraft) by calmly immediately setting course for La Guardia or Teterboro with no decision or response or recovery time needed at all. When a 35 second allowance for this was inserted into the simulations, the results were fatal crashes in both cases.

What struck me was how invisible this deficiency in the programming of the simulation would have been without a cockpit recording of the simulations. In many of the programmes we use to automate judgement-heavy processes, such as recruitment, many of the capital allocation decisions in financial institutions or even A-level grades, we do not have anything equivalent to a cockpit recording available to us. Perhaps we wait until either events prove us wrong (bad) or those on the receiving end of our automated decisions start to complain in sufficient numbers for us to reconsider (worse). What if quite a large proportion of the cost savings from automating these processes is in fact illusory as a result of our not putting enough time and attention into the original programming and/or not setting aside enough budget for maintaining it and challenging its decisions with parallel processes which do allow for human judgement? How much bigger is this problem going to become in the era of machine learning, where the programmes we are running are themselves several steps of abstraction away from those originally written by humans?

Our ability to programme machines to carry out billions of calculations in seconds would have been regarded as miraculous only a few decades ago and is still pretty astonishing to us now. We need to start thinking a lot more about how we can live alongside these ever more capable machines amicably over the long term. And it can’t be only programmers who get to see what the machines are doing – whatever the technical problems of allowing the equivalent of a cockpit recording to be made which can be understood by any of us, they need to be solved with as much urgency as the process automation itself. All of our decision-making processes need to be understandable and challengeable by the society in whose name they are carried out. It’s time to get serious now about our miracles.

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 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.

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.

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