Where there is no profit

09. January 2025 · Write a comment · Categories: Actuarial, Climate Change, Economics

I thought I would return to a point I raised in my musings on Deadmeat before Christmas, because it has probably got the most reaction from readers of the blog of anything I wrote in 2024. Most of the reaction, it has to be said, was disbelieving. The point in question was this:

And this is the key I think. What economists call “public goods”, goods which are non-rivalrous (ie your use of the sun’s energy does not stop somebody else’s unless you put them in the shade) and non-excludable (ie you cannot easily stop someone else from using it, in this case by sticking a solar panel on their roof), are very difficult if not impossible to make a profit from. Private markets will therefore not provide these goods, possibly at all without extremely artificial regulation (something we have probably had enough of with our utilities in the UK) and certainly not in the quantity that will be required.

Economics by Sloman, Garratt and Guest, which informs the Institute and Faculty of Actuaries’ core reading for its Business Economics syllabus states (in its 10th edition) that a pure public good is:

A good or service that has the characteristics of being perfectly non-rival and completely non-excludable and, as a result, would not be provided by the free market.

It then goes on to say that:

There is some debate as to whether pure public goods actually exist or whether they are merely a theoretical idea.

This I think brings us back to the extremely artificial regulation I mentioned above, as a lot of the economists who have got their views into this book (the sort that have contributed to the “debate” over whether pure public goods exist) appear to struggle with the idea that markets cannot provide everything better, even if you have to embark on some pretty tortuous contortions to create them.

My conclusion in my previous post was as follows:

Therefore if the private sector will not provide public goods and renewable power is predominantly a public good, then it follows that renewable power needs to be in public ownership. And if the climate crisis requires all power to be renewable and zero carbon, which it does, then it also follows that the entire power sector ultimately needs to be in public ownership too.

However I now realise that this is not quite correct. There is an alternative to public ownership. Not the ridiculous quasi-markets which bedevil our utilities in the UK currently, which I don’t expect to be with us for many more decades, but something else which is alive and well and in the process of taking over capitalism as we know it: private monopoly.

As Yanis Varoufakis says in Technofeudalism about green energy in particular:

Advances in green energy are pushing down fast the costs of green electricity generation. Even though the life cycle of fossil fuels has been extended, ruinously for the planet, cloud-based green energy is growing – and, with it, so is the relative power of cloudalists.

“Cloudalists” are our modern feudal lords. Whereas capitalism was a system in which the most powerful people as owners of capital were able to dictate how and where workers could use their capital to make profit for them, under technofeudalism the money is made as rent.

In the section entitled “The New Enclosures” Varoufakis says:

“In the eighteenth century, it was land that the many were denied access to. In the twenty-first century, it is access to our own identity.” Expanding on this:

Strewn across countless privately owned digital realms, it has many owners, none of whom is us: a private bank owns your ID codes and your entire publishing record. Facebook is intimately familiar with whom – and what – you like. Twitter remembers every little thought that caught your attention, every opinion that you agreed with, that made you furious, that you lingered over idly before scrolling on. Apple and Google know better than you do what you watch, read, buy, whom you meet, when and where. Spotify owns a record of your musical preferences more complete than the one stored in your conscious memory. And behind them all are countless others, invisibly gathering, monitoring , sifting and trading your activity for information about you. With every day that passes, some cloud-based corporation, whose owners you will never care to know, owns another aspect of your identity.

As Cory Doctorow says in his review of Technofeudalism:

Varoufakis points to ways that the cloudalists can cement their gains: for example, “green” energy doesn’t rely on land-leases (like fossil fuels), but it does rely on networked grids and data-protocols that can be loaded up with IP, either or both of which can be turned into chokepoints for feudal rent-extraction.

To make things worse, Varoufakis argues that cloudalists won’t be able to muster the degree of coordination and patience needed to actually resolve the climate emergency – they’ll not only extract rent from every source of renewables, but they’ll also silo them in ways that make them incapable of doing the things we need them to do.

When did we get so complacent about private monopolies? As Cory Doctorow reminds us in The Internet Con, in the 19th century debate in the US Senate about monopolies, Senator John Sherman (of the 1890 Sherman Act) gave the war against monopolies equal importance to the recently won War of Independence from the British Crown:

If we will not endure a King as a political power we should not endure a King over the production, transportation, and sale of the necessaries of life. If we would not submit to an emperor we should not submit to an autocrat of trade with power to prevent competition and to fix the price of any commodity.

The “harmful dominance” theory of antitrust (ie the idea that companies which dominate an industry are potentially harmful just because they are dominant, before they even start to abuse their dominant positions) led to the dismantling of several “empires”, including that of Rockefeller’s Standard Oil Company in the early 20th century.

But the power of the Varoufakis’ cloudalists vastly exceeds anything Rockefeller (oil), Carnegie (steel), Vanderbilt (railroads and shipping) and, of course, JP Morgan could muster even at the height of their influence.

Which brings me back to my original contention that the energy sector needs to be in public ownership. There may be many other “necessaries of life” which we may also want to consider bringing back into the public realm if their provision is otherwise going to slip beyond our regulatory grasp. Because the alternative is to relinquish any last vestiges of control over how we run our lives to puffed up billionaires. If you object to Elon Musk conducting polls about whether to stage a coup in the UK, then it is probably worth expending some effort on trying to stop someone like him deciding whether you can heat your home, cook a meal or charge your phone.

Deadmeat was overshot

18. December 2024 · Write a comment · Categories: Actuarial, Cartoons, Climate Change, Economics, Regulation, Science Fiction
Picture of Pinhead character wearing a Deadpool type mask made out of one of his ties

Imagine a super-hero who could not be killed. No I don’t mean Deadpool. A more apt name for our super-hero would be Deadmeat. Deadmeat is empirically dead, but, rather like the Monty Python parrot, is being energetically kept alive by the pretence of its continued existence amongst all of those around it. So much so that it becomes impolite to expose the pretence and point out that Deadmeat is in fact dead. If you really push, and someone likes you enough to want to give you an explanation, you will have a hand put on your shoulder and be led away to a corner to have the pretence explained to you. What that explanation turns out to be is something like this. Deadmeat is of course the Paris climate agreement from 2015 which committed 193 countries plus the EU to “pursue efforts” to limit global temperature rises to 1.5C, and to keep them “well below” 2.0C above those recorded in pre-industrial times.

Deadmeat, it turns out, wasn’t shot. Deadmeat was overshot. Under overshoot, we bring the terrible thing back under control after it has done the damage and hope we can fix the damage at a later date. It’s a bit like the belief in cryopreservation or uploading our brains into cyberspace in the hope that we can have our bodies fixed with future medicine or be provided with artificial bodies. It means relying on science fiction to save us.

Andreas Malm and Wim Carton have considered this approach and how we got here in their latest book Overshoot. For me there are two big ideas in this book, although the account of how things definitively got away from us immediately post pandemic and exactly how that played out is mesmerising too. I thoroughly recommend a read.

The first big idea is the problem with the justification for overshoot in the first place, which is that at some point in the future we will be so much richer and more technologically advanced that it will be much easier to bring carbon dioxide levels down to sustainable levels than to try and stay within sustainable levels now. In what they call “The Contradiction of the Last Moment” Malm and Carton show how an intense fresh round of fossil fuel investment is almost certain to occur close to a temperature deadline (ie fossil fuel companies rushing to build more infrastructure while it is still allowed), whether it is 1.5 or 2 degrees or something higher. Then, as they put it “the interest in missing it will be overwhelmingly strong”. If an investment is 40 or 50 years old, then it might not be so disastrous to have it retired, but if a fossil fuel company has invested billions in the last few years in it? They will fight tooth and nail to keep it open and producing. And by prolonging the time until the retirement of fossil fuel infrastructure, the capital which has used the time to entrench its position and now owns a thousand new plants rather than a few hundred will be in a much stronger position to dictate policy. The longer we leave it, they argue, the harder it will become to retire fossil fuels, not easier.

The second big idea explains why, despite the enormous price collapse of solar power in particular, there is no Big Solar to compete with Big Oil. As they put it “there was no Microsoft or Apple or Facebook. More broadly, there was no Boulton & Watt of the flow, no Edison Machine Works, no Ford factories, no ascendant clusters of capital accumulation riding this wave.” The only remotely comparable company would be Tesla, but they produced cars. Why is this?

Malm and Carton talk about “the scissor”, the difference between the stock of the fossil fuel industry and the flow of renewable power. Fossil fuel’s “highly rivalrous goods: the consumption of one barrel of oil or one wagon-load of coal means that no one can ever consume it again. Every piece of fossil fuel burns once and once only. But supplies of sunlight and wind are in no way affected by any one consumer’s use.”

And this is the key I think. What economists call “public goods”, goods which are non-rivalrous (ie your use of the sun’s energy does not stop somebody else’s unless you put them in the shade) and non-excludable (ie you cannot easily stop someone else from using it, in this case by sticking a solar panel on their roof), are very difficult if not impossible to make a profit from. Private markets will therefore not provide these goods, possibly at all without extremely artificial regulation (something we have probably had enough of with our utilities in the UK) and certainly not in the quantity that will be required.

In Postcapitalism, Paul Mason discussed the options when the price mechanism disappears and additional units of output cannot be charged for. As he put it:

Technologically, we are headed for zero-price goods, unmeasurable work, an exponential takeoff in productivity and the extensive automation of physical processes. Socially, we are trapped in a world of monopolies, inefficiency, the ruins of a finance-dominated free market and a proliferation of “bullshit jobs”.

This also ties in with my own experience and others I have spoken to over the years about how hard it is to invest outside of fossil fuels and make a return.

Therefore if the private sector will not provide public goods and renewable power is predominantly a public good, then it follows that renewable power needs to be in public ownership. And if the climate crisis requires all power to be renewable and zero carbon, which it does, then it also follows that the entire power sector ultimately needs to be in public ownership too.

And then the motivation for overshoot becomes clear and how high the stakes are: not just the proceeds of the sale from one dead parrot as it turns out, but the future of private power generation. My fear is that the Deadmeat franchise may end up having as many sequels as Godzilla (38 and counting). With the potential to do rather more damage in the process.

Chartered Actuary: a message to students

13. November 2024 · Write a comment · Categories: Actuarial, Professions, Regulation

I last talked about Chartered Actuary status here two years ago when the Institute and Faculty of Actuaries (IFoA) set out how they had decided to introduce it. I focused then on what we needed to do to make this a change worth making: like offering roles for actuaries on completion of core practice modules; not necessarily insisting on further actuarial specialisation as a requirement for senior roles within firms; getting comfortable with a much wider range of specialisms amongst those we consider to be actuaries. Some were already doing this then, but most of us have still not travelled very far in this direction. And I note that 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.

But the fact is that Chartered Actuary status has finally been launched this week. I am a retired actuary now but I have claimed chartered status nevertheless because it is a designation I very much think needs to be supported. However ultimately the success of it will not depend on employers or even the profession itself, and certainly not on retired old duffers like me. It will depend on students now and in the future. Therefore, in the unlikely event that any actuarial students are reading my blog, I am addressing this piece directly to you.

Whether you are a student who, like most actuarial students, started work with no or perhaps just one or two exam exemptions, or a graduate from an actuarial science undergraduate programme with most or all of the core practice exemptions, this means that the barriers to you starting to take your actuarial career off in the direction you want it to go in and think the world needs just got a bit easier to jump. If you are a graduate from some actuarial MSc programmes or even possibly a single qualification like the MMath in Mathematics and Actuarial Science at the University of Leicester (last plug for my former employer, I promise), you may be able to claim Chartered Actuary Associate status already.

Using it may not necessarily be so easy, particularly in the early years. Some employers may be resistant to the new designation. But if you are planning to join the profession to make a positive difference in the world, and that is in my view the best reason to do so, then you are going to have to shake a few things up along the way.

Perhaps there is a type of actuarial business you think the world is crying out for but it doesn’t know it yet because it doesn’t exist. Start one.

Perhaps there is an obvious skill set to run alongside your actuarial one which most actuaries haven’t realised would turbo-charge the effectiveness of both. Acquire it.

Perhaps your company has a client who noone has taken the time to put themselves in their shoes and communicate in a way they will properly understand and value. Be that person.

Or perhaps there are existing businesses who are struggling to manage their way in changing markets and need someone who can make sense of the data which is telling them this. Be that person.

Whatever you decide to do, do it with a chartered actuary designation, whether associate or fellow, as a badge that you are prepared to look beyond traditional ways of doing things and, where the historical way of doing things is obviously no longer working or could clearly be massively improved, do the hard work of rethinking things from first principles if necessary. If you do it right, this can be seen as a badge for actuaries who are both rigorous and flexible in their thinking. If that happens, the chartered actuary designation will flourish and it will also be of maximum benefit to you too.

So now it is up to you what becomes of Chartered Actuary status. I am really looking forward to watching what you do with it!

The Many Shades of Hope and Despair

31. July 2024 · Write a comment · Categories: Actuarial, Climate Change, Risk

The biggest battle in the climate sphere used to be between climate deniers and climate scientists, perhaps the battle we are most used to. Some, like Michael Mann for instance, are still earnestly fighting this one, but at the recent UK election, only 14% of voters opted for the one climate denial party (Reform). In fact the climate deniers are now more frequently climate denier deniers, ie denying they are or ever have been denying.

Then last year the biggest battle seemed to have become between climate campaigners and climate doomers. Rebecca Solnit wrote an exasperated piece in The Guardian in July last year called We can’t afford to be climate doomers, which drew an equally exasperated response from Jem Bendell called Let’s tell the moodsplainers they’re wrong and then get back to work.

I think Solnit clarifies most starkly what her argument is all about when she talks about hope:

Hope is not happiness or confidence or inner peace; it’s a commitment to search for possibilities.

However Bendell is also focused on searching for possible solutions. He quotes the Kenyan climate activist, Dr Nyambura Mbau, who argues that “The millions of people being uprooted by climate change do not benefit from the ‘stubborn optimism’ of environmental elites. Instead, they will be better served by the stubborn realism of the experts and activists now brave enough to call for urgent degrowth in rich countries and fair adaptation everywhere.”

Then there is that increasingly less marginal idea of degrowth. Only this week, James Meadway, Aashis Joshi and Jason Hickel had a fairly heated exchange on X about the recent paper by Hickel and Sullivan called How much growth is required to achieve good lives for all? Insights from needs-based analysis. Joshi felt that the degradation already caused by climate change made the outcomes possible via better distribution of wealth suggested by Hickel and Sullivan unachievable. One of Hickel’s tweeted responses went like this:

To say you’re happy to live in a world where you get to use a phone and laptop, but these should be actively denied to people who don’t have them because… ecological collapse might happen? Not acceptable.

I saw another take on this by Chris Shaw earlier today at the Dark Times Academy launch event. He seemed to share many of the views set out by Bendell above, and his book, Liberalism and the Challenge of Climate Change, goes further in suggesting that liberalism cannot provide us with acceptable climate solutions as long as it continues to present net zero as solving all our problems rather than as the least worst option that will still leave us with a much depleted global environment. His dismissal of degrowth revolved around the lack of narrative of how we get from here to there, specifically the dramatic movement of political power that would be required. However amongst the academics presenting their new courses for the Academy, Piers Locke’s Future Thriving looked like it would present some challenges to Shaw’s critique.

It seems to me that there is room for different takes on the optimism/realism axis here. For instance Simon Sharpe’s excellent Five Times Faster, while not shying away from the size of the task ahead on decarbonising, definitely has a feel-good quality to it. It is designed to wake us up to the possibilities offered to us by exponential technological change and social tipping points. By contrast, the Institute and Faculty of Actuaries’ Sustainability Group’s publication earlier this year, Climate Scorpion – the sting is in the tail, is all about waking people up to a higher level of climate risk than they may previously have been aware of. Meanwhile Sir David King, former UK Government Chief Scientific Adviser, is currently Chair of the Climate Crisis Advisory Group and founded the Centre for Climate Repair at the University of Cambridge. He set out his thoughts about where we are here.

So there are many shades of hope and despair on show here (I could obviously have mentioned many more that the few picked out here). What really matters is how fast and how radically we can act as a global species to the climate emergency. And the UK would make a good start if it stopped pretending that £22 billion is a lot of money for a developed country to find.

Changing my social infrastructure

04. June 2024 · Write a comment · Categories: Actuarial, Cartoons, Professions

Posted on LinkedIn on 4 June 2024

This is just a quick personal note to explain the imminent end of my LinkedIn account.

LinkedIn became an important tool for me in 2014 when I became a Lecturer at the University of Leicester and Programme Director for the BSc Mathematics and Actuarial Science there: to connect with potential students and guests to the university, to link up with former students, to publicise the activities of the Leicester Actuarial Science Society and to facilitate a professional network which would be useful to our current and former students. I also posted a few articles here along the way. However I will be leaving the University of Leicester on 30 June and moving to retired status with the Institute and Faculty of Actuaries soon afterwards. Therefore the description I have given myself here (Actuary, Lecturer and Writer at the University of Leicester) will at that point become almost entirely untrue! It therefore seems like an appropriate time to wind up my account here.

According to the latest analytics, I have around 1,400 connections on LinkedIn. Thank you to everyone who has connected with me over the years, particularly if we worked together in some capacity. I have managed to work with some wonderful people over the last 10 years. A particularly big thank you to all of the students who have made the job so enjoyable during that time.

Of those 1,400 connections, over 400 of you list the University of Leicester in your profiles. If you are a current or former student, or indeed anyone who needs to be in contact with a member of the Leicester actuarial team and are currently only connected to me, you should ensure that you are connected to at least one of the following excellent colleagues of mine: Leena Sodha, Paul King or Nigel Sell. You should, in addition, as a current Leicester student, join the LinkedIn group Leicester Actuarial Science Society. If you are a former Leicester student, the group you want is Leicester Actuarial Science Society – Alumni.

I will continue to be in various actuarial WhatsApp groups for the time being and on X (@weknow0). And, if you like any part of what I write, you can always subscribe (for free!) at weknow0.co.uk. For those of you who still want to keep in touch with me by email once I have left here and my Leicester email address has been discontinued, and we have not already shared alternative contact details, please send me a message on LinkedIn (or weknow0.co.uk) and I will be in touch.

With my best wishes for the future to you all.

Water water everywhere

11. April 2024 · Write a comment · Categories: Actuarial, Cartoons, Economics, Regulation

The Telegraph thinks the shareholders are to blame. The Guardian has the Australian investment bank Macquarie in its sights. Martin Bradley’s (the European Head of Infrastructure at Macquarie Asset Management) attempts in Infrastructure Investor at justifying their actions only seem to be making things worse. The FT is using it as an excuse to have a go at the Capital Asset Pricing Model. Count Binface has included in his manifesto for the London Mayoral election a requirement for the company’s management to “take a dip in the Thames, to see how they like it”.

I am talking of course about Thames Water, which really does appear to be everywhere at the moment. But how did we get here?

The management of water works by private companies was originally a legacy of the Victorians – most of the water supply and all waste water services moved into local government control from the late 19th and early 20th centuries. Control then passed from 165 different water supply bodies to 10 regional water authorities in 1974 before these were sold back to private companies in 1989.

Water is obviously a resource vital to all of us, as well as being what economists call a natural monopoly. There have been debates for quite some time now about renationalising the water industry – some arguing that it is too expensive and that a Welsh Water not-for-profit model is the answer, others saying that water, electricity and Royal Mail together would cost less than £50 billion to nationalise and would pay for themselves within 7 years if investors were just repaid what they had invested in the businesses, others saying that water is a failed business and could be acquired without compensation for shareholders as happened with Northern Rock.

What none of these appear to be arguing is that private monopolies should not exist as a reason for renationalising water. We have become so used to monopoly or oligopoly profits in everything from utilities to transport to mobile phones to supermarkets, that we sometimes forget that it has not always been like this.

This point was made to me powerfully in Cory Doctorow’s excellent The Internet Con – How to Seize the Means of Computation. The 19th century debate in the US Senate about monopolies was impassioned. Senator John Sherman of the 1890 Sherman Act effectively put the war against monopolies on an equivalent footing with the War of Independence from the British Crown:

If we will not endure a King as a political power we should not endure a King over the production, transportation, and sale of the necessaries of life. If we would not submit to an emperor we should not submit to an autocrat of trade with power to prevent competition and to fix the price of any commodity.

It’s stirring stuff. The “harmful dominance” theory of antitrust (ie the idea that companies which dominate an industry are potentially harmful just because they are dominant, before they even start to abuse their dominant positions) led to the dismantling of several “empires”, including that of Rockefeller’s Standard Oil Company in the early 20th century.

But then enter Robert Bork. Famous amongst other things for having an extremely dull taste in video rentals, Bork was Solicitor General of the US between 1973 and 1977, under Presidents Nixon and Ford, and Acting US Attorney General from 1982 to 1988 under President Reagan. Bork developed what he called a “consumer welfare” theory of antitrust. This allowed mergers and monopolies to proceed provided prices were lowered and/or quality improved, or even if they weren’t as long as some “exogenous factors” could be blamed for the price hikes or reduction in quality.

Sound familiar? It should, as we all still live in Bork’s world. For example, the microeconomics part of the Institute and Faculty of Actuaries’ Business Economics syllabus relating to imperfect markets reads as follows:

Note the focus on the different ways firms supposedly maximise profits (this approach is fairly thoroughly debunked by Steve Keen here) rather than on the market power they wield. The part which should include the regulation of monopolies reads as follows:

Note the lowering of expectations in 3.1.6: “Why government intervention might not improve market outcomes in practice even if the existence of ‘market failures’ suggest they can in theory”. However the real limitations are laid bare in 3.2. The main targets of “competition policy” in the text book (Economics by Sloman et al) you are pointed to by the core reading turn out to be what are referred to as “exclusionary abuses”, ie where businesses actively prevent effective competition from actual or potential competitors. As the preamble on competition policy in Sloman says:

Competition policy could ban various structures. For example, there could be restrictions on mergers leading to market share of more than a certain amount. (This is the harmful dominant approach, about which no more is said) Most countries, however, focus on whether the practices of particular monopolists or oligopolists are anti-competitive. Some practices may be made illegal, such as price fixing by oligopolists; others may be assessed on a case-by-case basis. Such an approach does not presume that the existence of power is against the public interest, but rather that certain uses of that power may be.

So, in other words, we will leave monopolistic businesses with the power and attempt to detect abuses of that power on a case-by case basis via overworked and under-resourced regulators. Sherman could have never cut Standard Oil down to size with this approach.

Yanis Varoufakis’ contention, in Technofeudalism, is that capitalism now only operates within the framework provided by the most extreme monopolists of Big Tech, with most of us either “cloud proles” (ie wage slaves working for Big Tech under feudal conditions) or “cloud serfs” (ie the rest of us working for Big Tech for free by creating content and sharing our data on their platforms). Big Tech’s size massively increased as a result of the bank bail out of 2008 and additional money pumped through them and the corporations working for them coupled with austerity for everyone else, which was therefore almost totally financialised – leading to the “everything rally” for asset owners.

As Varoufakis says:

When an activist state makes fabulously wealthier the same bankers whose quasi-criminal activities brought misery to the majority, while they are punished with self-defeating austerity, two new calamities beckon: poisoned politics and permanent stagnation.

Again, sound familiar?

It is not too late to push back against the monopolies which control our lives. Doctorow’s big idea in The Internet Con is interoperability, the ability of new technologies to plug into Big Tech’s services, systems and platforms, which Big Tech tends to resist with all of the power at its disposal. He makes a convincing case for how this simple change could reduce the size of Big Tech companies quickly and bring them within the scope of democratic control once more.

And for those businesses which need to be at monopoly scale to work at all? Water, for instance. That sounds like an unanswerable case for nationalisation to me. Perhaps assuming that dominant private companies are bound to be harmful needs to come back into fashion.

I don’t know what I don’t know

22. January 2024 · Write a comment · Categories: Actuarial, Cartoons, Legal, Regulation
A member splatted against the relentless forehead of a streamlined, efficient, simplified and clarified IFoA

So the proposals which I wrote about last month have been reconsidered by the newly elected Institute and Faculty of Actuaries (IFoA) Council on 15 October, where they agreed some tweaks to the original proposals as follows:

Council devised and ultimately voted for revised measures based on the member feedback it had received on the previously approved reforms. You told us that you wanted the new President and Council (2023-2024) to reconsider the reforms and we agreed this at our meeting on 1 September 2023. You told us that you wanted better communication and more engagement and we have embarked on one of the biggest member engagement exercises in our history which will continue next year into the role of Council. You told us that you were uncomfortable with the idea that actuaries would be in the minority on the board. We have responded by changing the makeup of the new IFoA Board so that it will continue to have a majority of actuaries. You told us that you wanted safeguards to ensure the IFoA Board could be held to account and that a “bad board” could not self-perpetuate. We have responded by ensuring that appointments of members and independents to the IFoA Board will need to be ratified by Council on first appointment and every 3 years for the remainder of their term.

So am I happy now? The answer is no in some respects and I don’t know in others. No I am not happy that a member vote still seems to be proposed for 2026, giving this proposal the inside track to becoming the final permanent governance structure by only asking for a vote after most of us will have become quite hazy about what went before it.

I don’t know because we are still not going to be given sight of any part of the DAC Beachcroft report to which these proposals are supposed to be a response. We are therefore being asked to completely trust the description of what was in it by the very people trying to sell us their proposals. That is a big ask in my view.

However it is also difficult to raise any formal objections to the proposed amendment to Regulations 2, 3, 4, 5, 6, 10, 11, 12 and 13 in this state of enforced ignorance. I will therefore be raising the concerns I have set out here by contacting the Corporate Secretary at the IFoA. If you feel that you can go further and formally object on the basis of what you have or have not been told, then those objections should be raised by 30 January to be considered.

Perhaps I am making too much of what I don’t know, but I was struck by the references here to any future consultation being confined to the role of Council, with the rest of the governance structure seemingly regarded as done and dusted. Also if you watch to the end of the little video there, you are confronted with this message:

Is our ability to continue to self-regulate at all really under threat? I would have expected to be told rather more about why this is before being asked for my views in a member organisation such as the IFoA.

I accept that many of the IFoA’s functions may need a more streamlined system to run them effectively. There are many different alternative structures which we could consider to achieve this. But these proposals are about changing the very nature of the IFoA and that requires full disclosure to members about why we are doing this and a chance to vote before we do so in my view. More than a tweak, in other words.

Horizon and its implications for us all

11. January 2024 · Write a comment · Categories: Actuarial, Cartoons, Legal, Prediction, Professions, Regulation
Copyright ©Steve Bell 2009/All Rights Reserved e.mail: belltoons@ntlworld.com tel: 00 44 (0)1273 500664. Reproduced by kind permission of Steve Bell https://www.belltoons.co.uk/bellworks/index.php/leaders/2009/2913-16-10-09_BOINGUSES

We have been here many times before, even in recent memory. The 2008 banking crisis, memorably immortalised by the Steve Bell cartoon above; the MPs’ expenses scandal the following year; the successive disappointments of Brexit; and now the the Post Office Horizon scandal. All of these had in common an initial public expression of outrage, followed by loud condemnations of aspects of it from within the Establishment, followed by a series of measures which generally failed to change anything substantive. So the ring-fencing legislation brought in to isolate the risk taking within banking from retail customers has steadily been lobbied against and is now gradually being unravelled. MPs continue to have expenses scandals. I don’t know how to encapsulate in a sentence the Muppet Show of how the Establishment has been trying to deal with Brexit since 2016. And now this.

The Post Office scandal seems to be being discussed everywhere: beyond the TV, radio and social media, it is in the pub, the supermarket queue, in families and workplaces. The Establishment condemnation is already underway, as pithily summarised by Marina Hyde here. I do not really care about the implications for the honours lists, but very much hope that the sub-postmasters and sub-postmistresses get the compensation they are seeking. However this time the response cannot stop there.

As David Allen Green has written in Prospect today (with a great overview of what has happened from a legal point of view), the scandal also represents a failure of the legal system. This was partly caused by the repeal, in 1999, of the part of the Police and Criminal Evidence Act 1984 which presumed in favour of individuals rather than computer systems. This has been particularly unfair in these cases as the evidence defendants needed to show that Horizon was at fault often remained undisclosed by the Post Office. It was also caused by the Post Office’s eagerness to pursue private prosecutions.

Coincidentally, I came across the concept of private prosecutions a couple of weeks ago while reading the excellent Butler to the World: How Britain became the servant of tycoons, tax dodgers, kleptocrats and criminals by Oliver Bullough (which also suggested to me that I should revisit the issue of Scottish Limited Partnerships soon, but I digress). As Oliver points out:

Under measures introduced in the post-2010 austerity agenda, defendants…have no prospect of reclaiming their expenses from public funds if they are convicted. Even if they’re acquitted, they can only get their expenses back if a request for legal aid has previously been turned down…Meanwhile, private prosecutors – whether individual or companies – can claim back all reasonable expenses if they lose. Financially speaking, a private prosecution is a one-way bet. As long as you can afford the upfront cost of bankrolling the case, you’ll get your money back because under common law you are acting on behalf of the Crown.

David Allen Green has called for private prosecutions to be abolished, which I would agree with. But I also think the burden of proof needs to be returned to the operators of computer systems in what I predict will become increasingly frequent human-expert system disputes in the future. In fact we need to go further than that and have a full public consultation into what legal protections individual humans will need in a world increasingly driven by decisions and calculations made by non-human systems.

Over seven years ago I wrote an article in response to Cathy O’Neil’s excellent Weapons of Math Destruction, where she set out the case against devolving important decisions to mathematical models without adequate feedback loops. I said then (with an Oppenheimer reference too!) that:

If mathematical models are to be the dominant regulatory tool of a financial world, and of the consultancies and financial firms competing in that world, then the time will come when mankind will curse the names of the highly paid professionals who followed inappropriate rules rather than exercising their own expert judgement when it mattered.

It is starting to look like we may be there already unless we act fast.

What would be gained from increasing the state pension for all?

09. January 2024 · Write a comment · Categories: Actuarial, Antifragility, Cartoons, Pensions, Regulation, Risk
Source: https://youtu.be/31xY6rYiu2E

When I was nearing qualification as an actuary at the turn of the century, one of the recommended texts for both the specialist pensions (the then equivalent of SP4 and SA4) exams was Alastair Jollans’ 1997 paper to the Staple Inn Actuarial Society (SIAS) entitled Pensions and the ageing population. At the time there was quite a lot of actuarial comment about how superior a funded pension system was to a pay-as-you-go system and the example of Chile in particular. The following sentence from Alastair’s paper stuck with me at the time:

It is also clear that the Chilean scheme made a huge psychological difference, and this may be one of the major advantages of funding.

Meanwhile the Labour Government had been moving to reform the State Earnings Related Pension (SERPS) with its Green paper of 1998 A new contract for welfare: partnership in pensions, and replace it with a new State Second Pension (S2P). It had two aims – giving more help to people for whom private pensions were not an option and helping moderate earners to build up better second pensions through the introduction of stakeholder pensions. The intention was that S2P would become flat-rate over time with the following reasons given for this (bold mine):

Although SERPS is an efficient second pension, it is earnings-related. It does least for those on low incomes who have most difficulty in building up a good second pension. Many people on modest incomes will also receive limited benefits from SERPS or from the private provision they may make instead.

So the limitations of the current system (where the new State Pension has replaced S2P and auto-enrolment has replaced stakeholder pensions), as previously discussed here, were recognised from the outset of the experiment of moving to funded pensions.

Fast forward to now and Chile’s system is tottering, leading to mass protests. It turns out that the psychological advantage of its funding approach was only an advantage for those that could afford it, whereas the 40% who gained no benefit from invested funds (a remarkably similar proportion to the UK statistics) preferred the psychological advantage of a guaranteed state pension. Even the FT admits it needs reform, although fairly technical in nature:

At the very least, a sensible reform now should be to eliminate the investment limits by asset class and introduce an investment policy based on risk metrics at the portfolio level. The government should also relax the restrictions on alternative investments and eliminate the ill-designed hedge requirements.

The Council on Foreign Relations was less restrained in 2022:

Pensions were never a good fit for strictly private management, as basic building blocks of the welfare state are definitive public goods. Yet the failure of the system has reverberated beyond the retirees trying to make ends meet. Pensions became a leading cause for the millions of Chileans who took to the streets in protest in 2019, spurring the formation of a Constituent Assembly to write a new Constitution that will be voted on in September.

The best path for pensions would be a reform that ensures adequate retirements for more Chileans. This requires a more robust public system with dedicated funding to sustain it. If legislators can make this happen, they can reduce the financial hardship too many of Chile’s elderly now face. And, to the benefit of democracy in both Chile and its neighbors, they could also thereby restore at least some of the political legitimacy that the old system helped to put in doubt.

In my first post in this series, I explained why the State Pension needs to be much bigger than the Triple Lock is ever going to get it to. The second post then moved on to discuss the leaky pensions budget and what to do about it. In this third and final post in the series, I focus on why increasing pensions should be a priority when there is so much destitution in all parts of our society.

We are living in anxious times, with discomfort about the state of the world now so extreme that many of us are disconnecting from it and, instead, treating it as a personal mental health challenge requiring breathing exercises and mindfulness and radio programmes like Radio 2 Unwinds with Angela Griffin and similar. This follows a pattern with other crises, where we have been encouraged to abandon collective action to protect our pay and conditions by ever more onerous anti-union legislation or to abandon collective action to combat climate change by ever more onerous anti-protest legislation. Instead we are constantly encouraged to look inward and focus on our own wants and the things about ourselves which are standing in the way of those wants, ie to approach the world solely as a consumer. It is much more convenient for the companies working in the retail markets if we all behave this way.

Moving away from the collective provision of state pensions for all to a reasonable level and instead towards the individual provision of funded occupational pensions follows this pattern. However, as we have seen, many have been left in poverty without any asset security as a result of this move. This leaves them more vulnerable to sickness, debt and generally less resilient to the uncertainties of the future.

Seth Godin recently blogged about the engineering philosophy essential to creating something both useful and fit for purpose. It involves asking who is it for and what is it for.

Increasingly I feel that we have lost sight of these two questions in how we provide pensions, my answers would be:

  • Who is it for? Everyone.
  • What is it for? To increase people’s resilience.

In the case of resilience, the discussion has been kept at a, in my view deliberately, high level of abstraction so that most people feel that it is not their concern. McKinsey produced a particularly incomprehensible example here, but it is probably unfair to pick on them as they are just one of many, and they did at least mention societal resilience. A great technique for excluding people from the discussion is to produce a proliferation of definitions which noone can agree on (five were identified in this article in Nature by Rockstrom et al, for instance). However, as Rockstrom identified, in essence a resilient system needs just five characteristics:

  1. Diversity, ie support comes in multiple forms and does not assume everyone is the same;
  2. Redundancy, ie if one part of the system fails, there is always a good Plan B and mechanisms available to replace system failures quickly and efficiently;
  3. Connectivity, ie our supply chains are diversified and the resources we need drawn from a wide range of sources, and our populations are kept well connected with each other and the services they need;
  4. Inclusivity and equity; and
  5. Adaptive learning, ie we review whether the system is working reasonably frequently and learn from experience.

So what would be gained from increasing the state pension for all?

  • Marginalising older people when their bodies already feel less resilient and forcing them into the boxes required by our processes of means-testing are likely to extinguish many of these voices from the national discussions we need to have. A significant increase in pensions for all, instead of the ridiculous triple lock which is only tolerated as it slowly gets us to this goal without having to have the discussion about what a decent pension would be, is what is needed.
  • A larger state pension would give us all more security through redundancy, ie a decent baseline underneath the other sources of income. Our invested pensions are not as diversified as they look and very vulnerable to a range of system-wide events and our means-tested benefits are very frequently prone to error and delay. The prospect of this greater level of security and certainty in retirement would also ease the burden of many working age families who are supporting older relatives, and the effects would therefore extend well beyond the retired population.
  • Poverty crushes the diversity of a population, as the cartoon above from the UN Special Rapporteur on poverty Olivier de Schutter makes clear. We need diverse people with diverse thought and we need to include them in our society and listen to what they have to say.
  • Focusing on those of retirement age to allow them to live better will save money in other areas. According to a Guardian study, an 85-year-old man costs the NHS about seven times more on average than a man in his late 30s. Health spending per person steeply increases after the age of 50. It would also reduce reliance on an inefficient and fragmented disability benefit system.
  • Increasing the state pension would obviously have a much greater effect at the bottom half of the income deciles than at the top and would therefore have a big impact on inequality. As the Institute of Fiscal Studies said of increases to the minimum wage for working people between 2011 and 2021:

...inequality in male earnings rose between 1980 and the Great Recession, driven by rising wage inequality at the top and rising hours inequality at the bottom. This trend appears to have stopped in the last decade, as growth in the minimum wage outstripped wage growth further up the distribution, and hours worked stopped falling disproportionately for low-wage men.

Increases to the state pension would be likely to have just as dramatic an effect.

And we all gain from a more equal society, even those we redistribute away from. As the Equality Trust have shown in their research, high levels of income inequality are linked to economic instability, financial crisis, debt and inflation; less social mobility and lower scores in maths, reading and science; an increase in murder and robbery rates; reduced longevity, more mental illness and obesity, and higher rates of infant mortality. People in less equal societies are less likely to trust each other, less likely to engage in social or civic participation, and less likely to say they’re happy.

My view is that we need to start somewhere in creating a more equal, and therefore more resilient, society here in the UK. And I would start with pensions.

Volunteers and Democratic Deficits

07. December 2023 · Write a comment · Categories: Actuarial, Cartoons, Legal, Regulation

My favourite bit of Scrooged is when Bill Murray is told that the people working in a homeless shelter cannot be fired because they are volunteers. It appears that the Institute and Faculty of Actuaries (IFoA) is instead in danger of morphing into such a sleek, streamlined, efficient, simplified and clarified organisation that noone would want to volunteer for it any more.

The long-running argument about the future governance of the IFoA grinds on. Four months after a small number of members alerted the rest of us to what was going on, and 194 members then objected in writing, the IFoA have now concluded a series of webinars explaining the proposals. I attended the final one on 28 November.

In a nutshell, the proposals are unchanged from those objected to, they are now being considered alongside the objections by the newly elected Council this month, which will be followed by a full consultation in January. The new governance structure will then be rolled out in the summer of 2024 and a member vote only allowed on the new structure two years later in 2026. Yes that’s right, not a typo: 2026!

The session I attended was all about how we needed to be more streamlined, more efficient, more credible in our governance. We needed to simplify our governance, clarify it. The recent embarrassments about outgoing CEOs was cited as an example of our poor governance without explanation. The independent report which they quoted from throughout to justify the proposals will not be provided to members as it includes contributions from people who only did so on the basis of anonymity.

There was a discussion about how the IFoA was both a business and a member organisation. But, in mentioning more than once how the proposals were only what any of the organisations members worked for would expect from their governance, the weighting given to these two roles was very clear. These were senior business leaders attempting to make the IFoA look more like the businesses they are more used to.

If you’re a senior business leader, then an organisation where any member can have some influence on its direction of travel must be incomprehensible. They are used to leading and being followed. Much was made of the waste of time that much Council business involved, and I am sure that is right. But that is just a motivation for change, as indeed was the entire presentation on 28 November. It was decidedly not a motivation for this change in particular.

We were told that other options had been considered, although bundling everything up into one board that did everything was the only one mentioned.

One of the other reasons given for the changes proposed was how much bigger the IFoA was now. Coincidentally, on 27 November, the Economic Affairs Committee of the House of Lords published its report ‘Making an independent Bank of England work better’. In it they made the following point:

The growth in the Bank’s remit has not been met with a commensurate increase in accountability and Parliamentary scrutiny. While an independent central bank reassures markets, critically important economic decisions are delegated to unelected officials. The Committee is concerned that a democratic deficit has emerged, which risks undermining confidence in the Bank and its operational independence.

We are being asked to quietly acquiesce to the creation of precisely this kind of democratic deficit in our own member organisation. Because, despite suggestions to the contrary in the webinar, we are primarily a member organisation and not like the organisations we all work for, something we have just been reminded of by being charged £750 for the privilege.

If we agree to this timetable, then by the time we get to 2026 I predict we will be assured that it would not be cost effective or a good use of the new unitary board’s time to uproot what will by then be the incumbent system. This would be giving these proposals an unfair advantage in deciding on the long-term governance of the IFoA.

My requests would be:

  1. Some summarised form of the independent report which protects people’s anonymity but allows us members to judge for ourselves the relative strengths and weaknesses of the analysis of our current governance and the options so far considered for change.
  2. An opportunity for a member vote on the structure adopted in 2024 alongside the consultation, rather than 2 years post adoption.

It is precisely at the stage of deciding that structure that all of the range of experience, talent and wisdom of the membership needs to be deployed, not at the point of rubber stamping a decision already made. If you agree with me that members are being sidelined in the decision-making process about the very nature of the IFoA’s future, then please send your feedback to governance@actuaries.org.uk.

« Older articles