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.

Actuaries and Hooky Street

03. October 2023 · Write a comment · Categories: Actuarial, Cartoons, Climate Change, Economics, Pensions

The latest publication from the Institute and Faculty of Actuaries (IFoA) is called Beyond the next Parliament: The case for long-term policymaking. It refers to a number of previous reports, such as the Great Risk Transfer report from April 2021 and the two more recent climate papers (here and here), all of which contained much thoughtful analysis even if I did not always agree with all of the recommendations.

The case for long-term policymaking is certainly something that needs to be made loudly and often, although I was perhaps expecting some discussion of concepts like cathedral thinking, ie a capacity to plan and implement projects over multiple generations, or intergenerational justice, an issue of particular importance when discussing responses to climate change, in tying these various reports together within a long-term narrative. The Good Ancestor by Roman Krzanic is a great starting point for considering such questions.

Instead the IFoA have chosen to go in a different direction entirely in linking this previous work together, displaying imprisonment by current short-term political thinking in a paper supposedly focused on the long-term to such an extent that I am now left feeling that I disagree with them about nearly everything.

Take pensions, for instance (bold type is mine):

With the decline of defined benefit (DB) pension schemes, the responsibility for investment and longevity risk is increasingly being placed on the individual.

In a world where responsibility for funding retirement is increasingly being placed on the individual, there is remarkably little consistent consumer information about how much someone should save into their pension, or what a ‘good’ pension pot constitutes.

The IFoA remains concerned that many UK households are not saving enough for later life, are not accessing free guidance or paid-for financial advice, and remain ill-equipped to deal with the risk of running out of money in retirement.

It is almost as if the transfer of risk to individuals is something inevitable, or beyond the ability of mere humans to control. In the words of the late great John Sullivan, in the theme song from Only Fools and Horses:

Cause where it all comes from is a mystery. It’s like the changing of the seasons and the tides of the sea.

Why Only Fools and Horses you ask? Well have you ever heard a better description of defined contribution pensions than:

No income tax, no VAT. No money back, no guarantee

The IFoA’s main concern is that UK households are not doing enough about this new “responsibility” to provide for their own retirement. And the state? The state pension is mentioned only once here:

Naturally, the next UK Government will need to address the adequacy question as part of a wider pensions strategy for the UK that also considers big questions such as the sustainability of the State Pension and the triple lock.

This of course is so-called “positive economics” in action, which makes much of only relying on objective data analysis, but within a policy framework which is not up for discussion. Increased state provision, which one would have thought would at least need to be considered in the mix in this case, is reduced to obsessive focus on tiny questions like the triple lock while being kept generally outside this policy framework. Instead we get this:

We recommend that the government should reinvigorate its public messaging around minimum pension saving levels – particularly through workplace auto-enrolment pension schemes – to ensure that consumers are not lulled into a false sense of security as to whether their pension saving will be adequate to achieve their retirement income goals.
In doing so, government should use expertise and evidence on testing behavioural responses to different messages and channels, to identify those that are most effective in impacting saving behaviour.

So at a time when, according to the Resolution Foundation, the marginal rate for low to middle income households have an effective marginal rate of tax of 63%, the IFoA apparently think it is acceptable to push the cost onto them even more in order to achieve a sufficient pension at retirement. A certain cost and uncertain benefit. It is not a basis for a minimum income guarantee.

The second section sets out the problems associated with long-term care, again asking for a greater contribution by individuals via an expansion of insurance and savings-based financial products.

We are back to the changing of the seasons and the tides of the sea in the next section on keeping pace with rapid digital transformation, which states that:

there has been a trend away from broad risk pools and toward more granular pricing based on an individual’s specific rating factors (i.e. their risk characteristics)

Note the use of the passive tense there – it implies that noone is responsible and there is no way we can swim against this current back up to those old broad risk pools however hard we try. And so we shouldn’t try. The only option is to instead try and lower the premiums at the bottom end a bit – which is explained in their other report, The hidden risks of being poor: the poverty premium in insurance. The model for this is Flood Re, which is explained here. Of course this probably won’t work if you are underinsured as, it seems, 80% of us are.

Section 3 remains one I can cheer about, laying out more clearly than I have seen before to the financial community the risks of climate change, with the work on biodiversity at a somewhat earlier stage. However a framework is immediately assembled in the next section, Going for growth to build a better Britain (a slogan which I am sure Liz Truss would have been quite happy with), to limit the options for tackling these risks. An example:

Even though there is evidence that infrastructure development can promote growth and job creation, governments may be forced to defer such funding until the national balance sheet looks healthier. Although governments may be partially able to finance infrastructure projects, given their capital constraints they also need to attract investment from the private sector.

Unbelievably, the rest of this section then focuses almost entirely on what can be done to lure the private sector into investing in preventing their own doom (not framed in those terms of course, but in terms of boosting growth rather than curbing emissions) along with everybody else’s. As long as private investors are looked after, everything else seems to be a secondary consideration. John Sullivan again:

C’est magnifique, Hooky Street.

Of course I am just having a bit of fun here with the Only Fools and Horses references and I am certainly not suggesting that everyone involved in financial markets is a Del Boy looking to take advantage of every punter or government that comes their way. That would be a caricature as gross as referring to the “dead hand of the state” or talking about public servants as “The Blob”. What I am saying is that the jostle of the market place cannot be the primary solution to many of the problems so accurately analysed here.

I realise I have been very slow to fully appreciate the IFoA’s general direction of travel, but by putting all of these reports together in one place they have clarified this for me. I believe that the overall programme of recommendations here would condemn the poor to further immiseration and uncertainty while letting government largely off the hook for solutions and companies largely off the hook in terms of further regulation. It would further accelerate the financialisation of our economy with the promise of additional financial markets to be exploited by the already wealthy.

This is not acting in the public interest but as a cheerleader for protecting the long-term profits of fund managers. And I despair that, three years on from the IFoA’s Economics Member Interest Group coming into existence, there should still be so little pluralism on display here in economic thinking that this is regarded as a balanced narrative.

It is clear to me that views outside the IFoA’s current policy framework will need to come from elsewhere. I am currently researching a paper on alternative approaches to pensions provision with Alan Swallow which I hope we will be able to publish something about soon.

The Government is using the latest pay increase to actually reduce its funding to the NHS for the second year running

19. July 2023 · Write a comment · Categories: Actuarial, Cartoons, Economics
Pinhead and spikes wait on a bench outside the doctor's room

NHS pay is supposed to be set with reference to the recommendations by the NHS Pay Review Body. The terms of reference of this body, often referred to as “independent”, mean that they are unlikely to make truly unaffordable recommendations, as two of their six considerations in making any recommendations are as follows:

  • the funds available to the Health Departments as set out in the Government’s Departmental Expenditure Limits; and
  • the Government’s inflation target.

Despite this, as recently as last month, Helen Whately, the minister of state for social care, was saying that the “government has to look overall at what is affordable”, adding that the PM has said ministers must be “responsible with the public finances…We take the advice and recommendations from the pay review bodies, but you’ll understand that government has to be responsible with the public finances. That’s why I can’t say here and now what the outcome of the whole process is going to be”.

The Government then finally confirmed that it would accept the recommendations of the Pay Review Body (report here), but that:

The government will fund this pay award through prioritisation within existing departmental budgets, with front line services being protected.

Existing budgets in the NHS were set on the basis of a 3.5% pay rise, rather than the 6% for most doctors, 8.1-10.3% for junior doctors and 5% for senior leaders which has been agreed. So it will mean a reduction in non pay budgets to meet the shortfall.

The NHS Confederation’s response is that:

If health leaders are expected to raid their own budgets to somehow plug this funding gap at local levels, it will almost certainly result in cutbacks to patient care elsewhere.

What they didn’t say was that the government will effectively be reducing their net spending on the NHS by not funding the award. As Richard Murphy has pointed out:

Firstly, all of these pay awards will be taxed. They extra pay will be the top part of a person’s pay. It’s likely that tax of 20% and NIC of 12% will be paid by each employee as a result.

On top of that employer’s NIC of 13.8% will be paid. In other words, of the gross cost (pay plus employer’s NIC), just over 40% will return to the Treasury in tax.

It makes no sense, in that case, to refuse that 40% back to the departments that are paying these people.

And that is even before you take into account indirect taxation and multiplier effects.

Not only does it make no sense for the government to use this of all moments to reduce their net contribution to the NHS, it also clearly goes against the wishes of the majority of voters. 82% think more funding is needed and support is found across all age groups, UK nations and across the political spectrum (63% among Conservative voters and 94% of Labour voters).

The main reason given by the government is that it “balances the need to keep inflation in check while giving some staff significant pay increases.” If that “balance” is achieved by robbing Peter of his operation due to a lack of beds or equipment in order to pay Dr Paul, then what sort of an achievement is that? And why, if the government are not prepared to actually fund the pay review body recommendations, do they have a say in whether they are accepted or not?

And this is not the first time. In July 2022, the failure to fully fund the recommended pay increase led, according to the NHS Confederation, to a shortfall of £1.8 billion, adding to the shortfall already due to inflation and increasing energy costs of over £4 billion. Then, as now, these increased costs will need to be absorbed by already over-stretched individual NHS trusts.

This will mean further additional avoidable deaths and more record waiting lists. It is a policy which is anything but balanced.

There are three less visible battles to win if we are to decarbonise five times faster than we have done in the last 20 years – and the good news is that actuaries can help!

20. April 2023 · Write a comment · Categories: Actuarial, Cartoons, Climate Change, Economics

In Simon Sharpe’s great new book Five Time Faster, he points out that, if we are going to decarbonise everything, “it’s not just the physical plumbing of the global economy that needs to be replaced, but the intellectual plumbing.” In a blog post from January, Three less visible battles to win, Simon mentions three targets in particular for this intellectual plumbing:

  1. Infrastructure that makes sure heads of government know just how bad climate change could get;
  2. Ideas in economics that exert a critical influence over governments’ policy decisions; and
  3. Institutions in diplomacy that will get the job done.

The first one means targeting the Integrated Assessment Models which have informed so much of our hesitancy and inappropriate prioritisations over the last 20 years where climate is concerned. I have written about this several times before, and this is something actuaries can contribute to much more in the future.

The second is at a much earlier stage, but the opening session in the current IFoA Presidential Speaker Series programme of talks indicates a greater confidence amongst actuaries to talk about, and influence, a more pluralist economic future.

And the third one will I believe become much more tractable once the intellectual tide starts to change.

I will be heading down with my banner to London tomorrow for Extinctions Rebellion’s Big One, alongside 90 other organisations united in demonstrating for a survivable future. Hope to see you there!

This actuary and science fiction

28. March 2023 · Write a comment · Categories: Actuarial, Birmingham, Climate Change, Economics, Science Fiction

I was looking through my old blog posts the other day and came across something I wasn’t looking for. Actuaries and Science Fiction told the story of a one-off visit I made to the Birmingham Science Fiction Group (BSFG), when the guest speaker had been the late great Brian Aldiss, who told the story of a time Kingsley Amis had had dinner with Margaret Thatcher. He told her what his book Russian Hide and Seek was about, to which she had responded that he needed to get himself another crystal ball.

By coincidence, I have just joined the BSFG nearly 10 years later (well I needed to think about it!), attending my first meeting online (Anna Stephens – really good about writing for Warhammer and Marvel in particular) and now very much looking forward to seeing Alastair Reynolds at my first in person meeting next month. I now have a bit more context for the Kingsley Amis story, as Andy Beckett has an account of a dinner Amis had at Thatcher’s Flood Street house in the late 70s (before she became Prime Minister). He wrote at the time:

I was rather overcome with the occasion and the fairly close propinquity of Mrs T…very much a new face to me as to most people, too much so to take in a lot about the fare except that it was properly unimaginative, and, as regards drink, ample enough. The hostess wore one of those outfits that seem to have more detail in them than is common, with, I particularly remember, finely embroidered gold-and-scarlet collar and cuffs to her blouse…[she was] one of the best-looking women I had ever met and for her age…remarkable.

And he also attributed the following quote to Thatcher herself:

People have always said that the next election is going to be crucial. But this one really will be, and if it doesn’t go the way Denis and I want then we’ll stay [in Britain], because we’ll always stay, but we’ll work very hard with the children to set them up with careers in Canada.

Anyway, back to Aldiss. He had told the story as he felt it showed how Thatcher (and he was not just picking on her as he felt this was a view held by many) misunderstood science fiction. It was not about prediction of the future, but for people who “liked the disorientation” of portraying an unfamiliar landscape.

Ursula K. Le Guin goes further in her introduction to The Left Hand of Darkness (just finished it and, if by any chance you haven’t read it already, it is an amazing piece of immersive world building which will leave you never feeling the same way about gender again). As she says:

Science fiction is not predictive; it is descriptive.

Predictions are offered by prophets (free of charge), by clairvoyants (who usually charge a fee, and are therefore more honoured in their day than prophets, and by futurologists (salaried). Prediction is the business of prophets, clairvoyants and futurologists. It is not the business of novelists. A novelist’s business is lying.

The weather bureau will tell you what next Tuesday will be like, and the Rand Corporation will tell you what the twenty-first century will be like. I don’t recommend that you turn to the writers of fiction for such information. It’s none of their business…All they can tell you is what they have seen and heard, in their time in this world, a third of it spent in sleep and dreaming, another third of it spent telling lies.

And, my favourite bit:

In reading a novel, any novel, we have to know perfectly well that the whole thing is nonsense, and then, while reading, believe every word of it. Finally, when we’re done with it, we may find – if it’s a good novel – that we’re a bit different from what we were before we read it, that we have changed a little, as if by having met a new face, crossed a street we never crossed before. But it’s very hard to say just what we learned, how we were changed.

The artist deals with what cannot be said in words.

The artist whose medium is fiction does this in words. The novelist says in words what cannot be said in words.

Who wouldn’t want to do that? It struck me while I was reading those words how the pandemic was something which changed all us survivors a little (and some a lot of course) and in ways that are often hard to put in words. But we are changed and there is work to do to try and understand how, even if that cannot be completely put in words.

The other thing from the introduction which has stayed with me is Le Guin’s contention that, while we read a novel, we are bonkers: believing in people who have never existed, hearing voices, perhaps even becoming other people. As she says:

Sanity returns (in most cases) when the book is closed.

But what about when you can’t close the book? Are we, to a greater extent, condemned to some level of future insanity? As William Faulkner said:

The past is never dead. It’s not even past.

In 2013 I tried to suggest that actuaries might also be about portraying an unfamiliar landscape and trying to work out what would hold true under different circumstances, and that they should therefore put themselves about a bit more, even if they sometimes made themselves look a bit foolish in the process. As William Hynes reminded me at yesterday’s excellent An introduction to alternative economic thinking event (recording available soon from the Institute and Faculty of Actuaries), the group of economists responding to the Queen’s question as to why noone saw the 2008 crisis coming, concluded:

In summary, Your Majesty, the failure to foresee the timing, extent and severity of the crisis and to head it off, while it had many causes, was principally a failure of the collective imagination of many bright people, both in this country and internationally, to understand the risks to the system as a whole.

If a failure of imagination is the main problem, I would suggest that science fiction must be at least a part of the solution. Looking a bit foolish at times is a bit of a speciality for me, so you probably won’t be surprised to hear that I am devoting most of my time from here on in to an almost certainly doomed attempt to write what Le Guin might regard as a good novel. I have been here before, way back in my pre-actuarial past, and have a nice back catalogue of unpublishable books and rejection letters to look at whenever I forget that I have no idea what I am doing. But if I find myself shouting to noone in particular that what I am trying to say cannot be said in words, I might dare to believe that I am on the right track.

Day 1 of the UCU Strike and it feels like a class war entirely manufactured by the Government

01. February 2023 · Write a comment · Categories: Actuarial, Legal, Regulation
Hundreds of thousands of public sector workers were on strike today. I was one of them. Meanwhile the Bill above is making its way through Parliament – it was voted through earlier this week by all but one of the Conservative MPs, but is currently getting rather more scrutiny and push back in the House of Lords.

It seems likely that there will be legal challenges to some elements of the Bill and that some of them will be successful. The Labour Party have promised to reverse it if they win the next election.

I spent my first strike day ever (yes, I know, I am just a political union member and a mere picket tourist – all of these criticisms are entirely justified) by attending a meeting of the Leicester Actuarial Science Society with the Institute and Faculty of Actuaries (IFoA) President Matt Saker. It was a very well attended event and there were a lot of questions for Matt. These ranged from the IFoA strategy in Africa, to mutual recognition agreements with the Institute of Actuaries in India to the pros and cons of the recent vote to create a Chartered Actuary status for associates and fellows to the future relationship of the profession to AI applications, reflecting the global nature and broad range of interests of the student audience. I felt very much like I was witnessing the next generation of actuaries getting stuck into the issues that would be important to them through their careers, and it was inspiring to see.

Back to the strike. I differ from many of the strikers interviewed in that, in my view, I was not doing anything particularly altruistic by striking. I was standing up for my own pay and conditions. Which, it seems to me, everyone should be able to do in a free society. Years of anti union legislation, uberization and the growth of sectors with weak unions has made us used to having to negotiate for ourselves individually or in small groups against much more powerful employers. The fall in real pay over the last 12 years indicate that this has not really worked for us and perhaps a new era of collective bargaining is now necessary.

Meanwhile the Government thinks that it is a better idea to muzzle unions and repress future strike action than to deal with any of the grievances of the workers they represent. They think this is a better idea than to build anything, invest in anything, or do anything positive at all. You have to ask who such a move, temporary and largely struck down as illegal as it is likely to be, is designed to impress: future party donors perhaps?

The next generation I saw today did not strike me as one which will have much patience for such manufactured class wars and the governments which manufacture them.

It is my hope and, after today, my belief that they will think we have more important things to be doing.

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.

Do cuttlefish dream of the passive electroreception of sharks?

02. September 2022 · Write a comment · Categories: Actuarial, Cartoons, Climate Change, Economics
“Tom-and-Jerry-tom-and-jerry-81353_800_600” by momokacma is licensed under CC BY 2.0.

We do it all the time. We assume that the animals around us experience the world as we do, with our obsession with the visual sense. We are used to anthropomorphising animals in our cartoons, but it goes much further than that: for instance if, like a dog, your sensory world or Umwelt is primarily based on smell rather than sight, then that daily walk you take with your dog has very different highlights and notable features (amazingly the slits on the side of a dog’s nostrils allow it to smell on out-breaths as well as in-breaths). We have sayings based on these anthropomorphisms: for example, the “unconcerned” frog in the water as it is heated to boiling (cited by Emily Maitlis in her recent speech in Edinburgh) may not be unconcerned at all, merely showing its distress by filling the air with smells like peanut butter, cashew nuts or curry rather than via the reactions we would expect from a human.

Our vision is not even all that extraordinary compared to some other animals. Mantis shrimps have more classes of photoreceptors covering the ultraviolet spectrum than we have in total. They are the only animals who can detect circular polarization, where the plane in which the light is polarized also rotates. However they are much worse than us at telling our visual range of colours apart and may not even have a conception of colour as we know it at all. We don’t know.

We are not even sure how many senses there are. Aristotle said there were five (sight, hearing, smell, taste and touch), but missed our senses of proprioception (ie awareness of your own body) and equilibrioception (ie sense of balance). There are also animals who have a secondary system for detecting odours, or who detect the body heat of their prey via their brain’s visual centre or have sensors which both detect electric fields and pressure. How should we categorise these and does a clear division between senses make any sense? We don’t know.

Elephants can hear each other several miles apart just after sunset, but we don’t know what they are listening for. Beaked whales have a range of crests, ridges and bumps on their skulls which are not outwardly visible other than via the echolocation they use, but we don’t know why.

And finally, for now, the cuttlefish of the title. When cuttlefish sense sharks, who have passive electroreception (ie the ability to detect electric fields in other animals), they stop moving, hold their breath and cover their gill cavities to reduce the voltage of their electric fields by up to 90%. I could go on, but all of this and so much more is contained in Ed Yong’s masterful An Immense World, which I could not recommend more highly, not only for the content but also for the wonderful joyful writing throughout (AC/DC’s Rock and Roll Ain’t Noise Pollution even gets a mention!).

The recurring theme for me is how much we still don’t know about all of these animals, and the amazing new discoveries which are being made every year. Every animal perceives a different world from the one we think we are living in, many of these perceptions currently (and in some cases perhaps permanently) impossible for us to understand. It takes an extraordinary level of anthropomorphic arrogance for us to convert all of those strange and wonderful lives into the concept of natural capital.

The Institute and Faculty of Actuaries’ Biodiversity and Natural Capital Working Party defined natural capital in their paper from April 2021 (which acknowledges the concerns I am raising here and those raised by others) as follows:

The concept of ‘natural capital’ therefore aims to recognise nature as an asset and aims to ensure that
the goods and services offered by nature become a part of decision making by governments,
businesses, and individuals regarding resource allocation, growth and development.

The Dasgupta Review has gone further, focusing on the economics of diversity. As it acknowledges:

The Review has developed the economics of biodiversity by viewing Nature in anthropocentric
terms. That is an altogether narrow viewpoint, but it has a justification. If, as we have shown in
Part I, Nature should be protected and promoted even when valued solely for its uses to us, we
would have even stronger reasons to protect and promote it if we were to acknowledge that it
has intrinsic value.

I strongly disagree. As George Monbiot pointed out several years ago, markets change the meaning of the things we discuss, replacing moral obligations with commercial relationships. The latest article in The Actuary magazine on natural capital discusses ecosystem collapse in its final paragraph in terms of how it would “negatively impact GDP” and “economic value”.

Once the diversity of nature can be reduced to a monetary amount or metric value, it can obviously be modelled much more easily but, as we have seen again and again within the finance sector and elsewhere, that is at the expense of consideration of any other aspect of our relationship with it.

Perhaps cuttlefish do dream of the passive electroreception of sharks. If they only knew what we were up to, they might instead have nightmares about their balance sheet entries in our spreadsheets.

Could climate change slash global GDP by 18%? It’s much worse than that

05. May 2021 · Write a comment · Categories: Actuarial, Climate Change, COVID-19, Economics, Prediction, Risk

Last week, the news from the Actuary magazine was that climate change could slash global GDP by 18%. This was based on a Swiss Re report, the economics of climate change, from which the analysis above is taken.

According to the report, “The current trajectory of temperature increases, assuming action with respect to climate change mitigation pledges, points to global warming of 2.0–2.6°C by mid-century.” It was unclear why they had decided to stop at 2050, when current commitments continue to push temperatures up until 2100. And the scenarios from the IPCC’s AR5 Synthesis Report (see below) show that the path we are currently on diverges far more considerably from the Paris agreements after 2050. Climate effects are very long-term and many of the impacts of a 2-3°C warming would be irreversible ones, ensuring continuing losses at similar or greater levels for decades to come, and that is before we even consider the much higher probabilities of feedback effects: from the melting of the permafrost, additional methane releases, loss of Amazonian carbon and the loss of the albedo reflectivity of Arctic ice. The Swiss Re report makes clear that is has not considered these.

You might notice that there is a separate column to the left, in a different colour, with the title “Well-below 2°C increases” and sub-title of “Paris target”. It is actually an agreement which 189 countries have signed up to, including the UK. As the Paris Agreement says (Article 2 Point 1):

This Agreement, in enhancing the implementation of the Convention, including its objective, aims to strengthen the global response to the threat of climate change, in the context of sustainable development and efforts to eradicate poverty, including by:
(a) Holding the increase in the global average temperature to well below 2°C above pre-industrial levels and pursuing efforts to limit the temperature
increase to 1.5°C above pre-industrial levels, recognizing that this would significantly reduce the risks and impacts of climate change;

There has been some debate over whether the Agreement is aiming for 1.5°C warming with a 50% chance of staying below it, or for “well below” 1.5°C similar to the 2°C goal with a 66% chance of avoiding more than 1.5°C warming, but the modelling used for the next IPCC report has adopted the latter definition. Either way, I cannot see why Swiss Re has decided to put the Paris Agreement targets in a different column from what it calls the “likely range of temperature gains” as if those we have committed to are no longer feasible to aim at.

In saying this, I do not underestimate the massive challenge of keeping to the Paris target. As Mark Lynas says in Our Final Warning, at the end of 2018 over 1,000 GW of additional fossil-fuelled electrical power generation capacity was planned, permitted or already under construction around the world, equivalent to adding an additional 188 Gt CO2 into the atmosphere to the 658 Gt already baked in from existing infrastructure, which gives a total of 846 Gt of CO2 not including impacts from deforestation, agriculture and future land-use change. This compares to a future carbon budget as estimated at the end of 2018 by the IPCC (although estimates of this vary considerably) of 420 Gt of CO2 (or 1,170  Gt of CO2 for 2°C warming). So an extraordinary change of direction is required and we should be very cautious of getting anywhere near these limits when we do not know precisely where they are.

Which brings me onto the modelling of economic impacts. The first thing to say is that modelling in terms of impact on GDP, while guaranteed to get the attention of the financial community, is perhaps not the best way of communicating the devastation of runaway climate change.

In the summary of Mark Lynas’ excellent book Six Degrees: Our Future on A Hotter Planet , which summarised the scientific consensus already arrived at by 2007, 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 [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 recent update to this: Our Final Warning, describes “entering the three-degree world means we are now living in a hotter climate than any experienced on Earth throughout the entire history of our species”. These impacts, which are likely to pose existential risks for many, appear totally inconsistent with the economic loss modelling shown above.

In his 2020 paper, The appallingly bad neoclassical economics of climate change (apologies, Journal access required), Steve Keen says in the abstract:

Forecasts by economists of the economic damage from climate change have been notably sanguine, compared to warnings by scientists about damage to the biosphere. This is because economists made their own predictions of damages, using three spurious methods: assuming that about 90% of GDP
will be unaffected by climate change, because it happens indoors; using the relationship between temperature and GDP today as a proxy for the impact
of global warming over time; and using surveys that diluted extreme warnings from scientists with optimistic expectations from economists. Nordhaus has misrepresented the scientific literature to justify using a smooth function to describe the damage to GDP from climate change. Correcting for these errors makes it feasible that the economic damages from climate change are at least an order of magnitude worse than forecast by economists, and may be so great as to threaten the survival of human civilization.

There follows a demolition of the methodologies employed by Nordhaus and others in this field. To be fair to the Swiss Re report, some of the criticisms in Keen’s paper appear to have been borne in mind when constructing their model, eg:

A shortcoming of our model build so far is that some economic impacts are linearly estimated: non-linearities are not adequately captured. We use multiplicative factors of 5 and 10 to simulate the increasing severity of outcomes from nonlinearities… Importantly, the framework does not consider
tipping points, events such as the partial disintegration of ice sheets, biosphere collapses or permafrost loss, that pose a threat of abrupt and irreversible climate change. This is because it is thought that tipping points will materialise well after our model horizon of mid-century only.

And as the Swiss Re report also acknowledges:

It is likely that the estimated impacts of GDP damages from climate change will rise as existing modelling develops to incorporate economic linkages in trade, migration and other channels, and to generalise the results to multiple countries.

And they are getting criticisms from the usual suspects of climate denial, eg Bjorn Lomberg on Twitter here, that even their attempts to date to quantify the uncertainties caused by non-linearity are a step too far.

And yet there remains a problem with these analyses in that they fail to capture existential risk. One of the things Steve Keen points out in his paper is the different attitude Nordhaus found towards estimating damages from climate change in natural scientists as opposed to economists. Natural scientists typically estimated the damage at 20-30 times higher than economists and some refused to cooperate with the exercise at all:

I must tell you that I marvel that economists are willing to make quantitative estimates of economic consequences of climate change where the only measures available are estimates of global surface average increases in temperature. As [one] who has spent his career worrying about the vagaries of the dynamics of the atmosphere, I marvel that they can translate a single global number, an extremely poor surrogate for a description of the climatic conditions, into quantitative estimates of impacts of global economic conditions. 

But how do you calibrate what is clearly a complicated model that Swiss Re and Moody’s have constructed for this analysis? Obviously we all have a very recent GDP fall in our minds at the moment – here is a summary from the UK Commons Library of Economic Indicators as at 30 April 2021 (themselves sourced from OECDstat and Eurostat):

This shows an almost identical GDP fall of 10.5% year on year in Q2 2020 for the OECD as predicted in the event of a 3.2°C warming, although it has bounced back pretty quickly since. For a longer term view of the global data, Our World In Data have an Annual growth in GDP per capita graph which runs from 1961 to 2017 (see below).

One very large GDP fall which stands out in the data here is the 26.5% fall in China in 1961. This was towards the end of the China’s Great Famine, in which approximately 3 million people died of starvation over a 3 year period. This certainly qualifies as an existential event and Swiss Re’s modelling suggest something of similar proportions in Asia and Africa at 3.2°C warming.

The biggest danger in all of this is that rich countries will look at a 10.6% reduction in GDP (at 3.2°C warming) and think this liveable with and adaptable to for their populations. After all, Simon Wren Lewis calculates that the austerity policies between 2010 and 2018 in the UK reduced GDP by nearly half of this amount every year for at least the second half of this period, compared to where it would have been without these policies, with an estimated cumulative loss of 15.9% of GDP. An 18.1% overall world average loss, however, effectively means more than a 25% loss for the rest of the world outside the OECD, as the OECD accounts for around half of the world’s total GDP which, even if we did not allow for the acknowledged likelihood that these are underestimates, is still in the Chinese Famine category of disaster and neither liveable with nor adaptable to.

We are already seeing vaccine nationalism carve up the world between rich and poor countries, with up until last month only 0.3% of the vaccines administered around the world having gone to people in low-income countries. This is likely to reduce the ability of poorer countries to be represented properly at this year’s COP26 when it frames a global response to the climate change which will affect them so disproportionately. And the losses if we do not act will be measured in far more frequent floods and sea level rise, extreme storms and heatwaves, crop failures, water and food shortages and mass migration on a scale we have never seen before, not GDP.

Could climate change slash global GDP by 18%? It’s much worse than that.

 

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