Election forecasts

The result of the forthcoming General Election is not in much doubt it would seem. Eight different polling organisations’ latest polls are shown above, and the similarities between them are so much more striking than the differences. It appears that we will be going through the motions of a process which is to a large extent predetermined on 7 May. The election result is not where the uncertainty lies.

However, the day afterwards, when the general public no longer has any say in what happens, is still deeply uncertain. Although the parties have all let us have their manifestos, details about how they would behave in the event of a distribution of seats which seems to be largely already decided in most cases (presumably because the parties think we might vote differently if we knew) are very sketchy. Does this meet the definition of democracy, ie a system of government by the whole population? The Electoral Reform Society would say not. I would argue it does.

If the election result is largely as expected what would it tell us about the views of the electorate? I think it would tell us:

  • They don’t want austerity on the scale of 2010-12 again (which is one reason why the Conservatives and Liberal Democrats together don’t appear likely to get a majority);
  • They are not as obsessed with immigration policy as the two main parties think they are (which is why they seem prepared to vote for a range of different approaches to managing immigration with no approach commanding majority support);
  • They don’t want a referendum on whether to stay in the EU (which is why the Conservatives and UKIP together will not be able to get a majority); and
  • They don’t support the current student fees system and don’t believe it is indistinguishable from a graduate tax (which is another reason why the Liberal Democrats and Conservatives together seem unlikely to get a majority).

There are probably several other attitudes amongst the electorate that can equally well be divined in the negative in a similar way (the BBC summaries of the parties’ positions on a range of issues can be found here), but the point is that a finely balanced pattern of parties of the type we look likely to end up with does not represent an inability to make a decision. It does however represent a determination not to allow any single party to make decisions. That seems to meet a reasonable definition of democracy to me.

Go on pick a card

Defined ambition has failed.

  • This was mainly because, tasked with suggesting a less onerous alternative to defined benefit (DB) schemes that gave more protection than defined contribution (DC) schemes, the pensions industry (including actuaries) did not get behind the least bad option, but instead presented a spectrum of options
  • The public and employers were unimpressed
  • And employers had enough on their plate anyway dealing with auto-enrolment
  • So they have now all (or nearly all) enrolled their employees into DC
  • And the reason they are in DC now is the same reason they were in DB before: because they were offered so many choices they lost sight of the fact that there was a choice.

DA options

The time to significantly influence corporate pension provision would appear to have passed until people realise how hard it is to make sufficient provision via a DC scheme. That may not be until the money actually runs out as the finance industry has a proven track record in keeping people in schemes (eg the early personal pensions and later endowment mortgages) long after they retain the capacity to do them any good.

In the meantime, people with DC pensions and madly transferring DB members now have freedom and choice. I predict that this too will fail.

  • This will mainly be because, tasked with providing cost-effective advice to people to empower them to make good decisions about their financial future, the pensions industry do not get their act together and just present a spectrum of options
  • The public will be unimpressed
  • And employers, who might have been persuaded to increase employee education and engagement in pensions, will have enough on their plate anyway dealing with auto-enrolment
  • So now most of them will be managing their own retirement with not enough money, vulnerable to pensions scammers and paying far more tax than they need to
  • And the reason they will not be in an annuity now is the same reason they were in one before: because they were offered so many choices (see the Pension Wise website, inexplicably still in an unfinished Beta state) they lost sight of the fact there was a choice.

Pension_Wise_Logo

The time to significantly influence individual pension provision appears to be rapidly running out.

How does this story end, I wonder?

shutterstock_84989578

The Institute and Faculty of Actuaries (IFoA) is introducing a new mandatory Actuarial Profession Standard (APS) in relation to review of actuarial work. The existing requirements in the APS applying to scheme actuaries will be withdrawn.

APS X2 Review of Actuarial Work will come into force on 1 July 2015 and is accompanied by a detailed, practical Guide. One of its key requirements is that actuaries, for any piece of work they wish to have reviewed, will need to consider the need for that review to be independently carried out, ie by someone not otherwise involved in the work in question.

I should declare straight away that I have a conflict of interest about this new standard, having set up a business because I felt scheme actuaries should have access to peer review services from an experienced scheme actuary outside their organisations. I am delighted that an idea which seemed a little odd to some when I first started offering these services in 2013 should now be regarded as sufficiently mainstream by the IFoA to prompt a revision of peer review guidelines.

Under APS X2, review processes are defined as either work review or independent peer review. Whereas work review is a general term covering all forms of review processes, the term independent peer review can only be applied to review processes involving reviewers not otherwise involved in the piece of work under review.

There are many reasons why you might want to have your work independently reviewed, for example:

  • Work reviewed within a firm might be influenced by the respective positions of the actuary and his/her reviewer within the management structure of the organisation;
  • Even if the work is reviewed by a colleague completely objectively, it might not be seen to have been;
  • There is a risk of group think in any organisation. Review from outside can significantly reduce this risk;
  • An independent reviewer may have a different range of experiences to draw on from those within your organisation. This can be particularly useful when reviewing work where there are potential conflicts of interest or concerns over how best to communicate a piece of work.

If this sounds of interest and you think it might be time to take a look outside for some of your peer review needs, my details can be found by following the link.

 

There have been a lot of predictions already for 2015. The Chartered Institute for Personnel and Development predicts employment in the UK increasing by half a million, GDP growth of 2.4% and earnings growth of between 1% and 2%, ie keeping its predictions reasonably close to what happened in 2014 and/or what the OBR, OECD and IMF are predicting. The annual FT economists’ survey resulted in an average conclusion amongst 90 economists that GDP growth would increase from 2.4% pa to 2.5% pa around election time and then on to 2.6% pa soon after. I could go on but I think you get the general idea – small changes around current economic statistics with a remarkable level of agreement amongst the experts. It’s enough to make you want to use these predictions to populate your models with, which is of course the general idea.

But before you get any idea that these people know more about 2015 than you do, consider what was being said about the oil price only 6 months ago in the Office for Budget Responsibility’s Fiscal sustainability report. Here is the graph:

Oil predictions

Once again, there was a trend of projecting a price rather similar to the current one and a remarkable level of agreement amongst the experts. Here is what has actually happened subsequently:

Brent crude oil price

Now I don’t want to pick on these forecasters in particular, after all the futures prices indicated that these views were the overwhelming consensus. But the oil price is a fundamental indicator in most economic models – Gavyn Davies details how the latest fall in oil prices has changed his economic forecasts here – with implications for inflation and GDP growth, and dependent upon predictions about many other areas of the political economy of the world which impact supply (eg OPEC activity, war in oil-producing areas) and demand (eg global economic activity). So an ability to see a big move in oil prices coming would seem to be a clear prerequisite for being able to make accurate economic forecasts. It seems equally clear that that ability does not exist.

Economic forecasts generally tell us that things are not going to change very much, which is fine as long as things are not changing very much but catastrophic over the short periods when they are. Despite the sensitivity testing that goes on in the background, most economic and business decisions are taken on the basis that things are not going to change very much. This puts most business leaders in the individualist camp described here, ie a philosophical position which encourages risk taking. Indeed even if some of the people advising business leaders are in the hierarchist camp, ie believing that the world is not predictable but manageable, to anyone with little mathematical education this is indistinguishable from an individualist position.

The early shots of the election campaign have so far been dominated by the Conservative Party branding Labour’s spending plans (which to the extent they are known appear to involve quite severe fiscal tightening, although not as drastically severe as Conservative ones) as likely to cause “chaos”, while the Labour Party wants to wrap itself in the supposed respectability of OBR endorsement of their economic policies. Neither of them has a plan for another economic crisis, which concerns me.

What are desperately needed are policies which are aimed at reducing our vulnerability to the sudden movements in economic variables which we never see coming. We should stop trying to predict them because we can’t. We should stop employing our brightest and best in positions which implicitly endorse the assumption that things won’t change very much because they will.

What sort of an economy would it have to be for us not to care about the oil price? That’s what we need to start thinking about.

The announcement by the Office of Qualifications and Examinations Regulation (Ofqual), the UK schools examination regulator, of the new grade structure for GCSEs is explained on their website by their Chief Regulator Glenys Stacey as follows:

For many people, the move away from traditional grades, A, B,C and so on, may be hard to understand. But it is important. The new qualifications will be significantly different and we need to signal this clearly. It will be fairer to all students that users of the qualification will be able to see immediately whether they did the new or a previous version of the GCSE. The new scale will also allow better discrimination between the higher performing students.

This is a big claim, which is not supported by any evidence I have seen. As Dylan Wiliam pointed out as long ago as 2001, the available data suggest that a student receives the grade that their achievement would merit only around 65% of the time. This is very close to the proportion of the time a random variable (which I think is how an examination mark needs to be treated) with a Normal Distribution falls within one standard deviation either side of its expected value. For mathematics, grade boundaries in 2014 were about 15% apart (80% A*, 65% A, 50% B, etc).

Therefore the narrowing of the grade boundaries the new system ushers in, now helpfully illustrated by Ofqual, will merely introduce more randomness to the grading process amongst higher performing students.

Ofqual

If the distribution of marks really is normal, a replacement of a 15% grade width by one closer to 10% would be expected to reduce that 65% accuracy to closer to 50%, ie you will be as likely to get the wrong grade as the right grade. This does not look like progress to me. Ofqual are, however, undaunted:

We realise introducing the new GCSEs alongside other changes will be challenging for schools, teachers and students. But the prize – qualifications that are better to teach, better to study, better assessed and more respected – will be worth it.

I remain to be convinced.

I ask this question because:

  • I have just read The Spirit Level by Richard Wilkinson and Kate Pickett, and am convinced by their arguments and evidence that inequality lies at the root of most of the social problems we have in the UK; and
  • As a scheme actuary, I persuaded myself that I was facilitating a common good, namely the provision of good pensions to people who might not otherwise have them to as high a level and for as long as possible given the economic conditions of the sponsors. The introduction of the Pension Protection Fund reduced the importance of the scheme actuary role, by mitigating the impact of sponsors not meeting their obligations, but still left a job I felt was worth doing. However, it now seems to me that, if pensions are not tackling inequality or even exacerbating it, they might be doing more harm than good.

First of all, I strongly recommend the Equality Trust website, which has a number of graphs showing the links between inequality and various social ills. One example, showing the relationship between inequality and mental illness, is set out below.

Equality Trust graph

So what is the evidence on inequality and pensions? Certainly inequality, as measured by the Gini coefficient, in this case after a reduction for housing costs, has increased markedly in the UK since the 1960s.

Gini over time

While the proportion of private pension provision since 1997 as a percentage of the workforce has fallen (courtesy of the Office for National Statistics).

ONS workplace pensions

But is there much of a correlation between them? Well there is a weak negative correlation between the Gini coefficient and the percentage in workplace pensions as a whole.

Gini v workplace pensions

And a rather stronger one when we just look at defined benefit (DB) pension scheme membership.

Gini v DB scatter

Neither of these are particularly strong correlations. Any impact by workplace pensions on inequality is likely to be limited of course, because they are in general structured (via final salary formulae in the case of DB, and employer and employee contributions as a percentage of salary in the case of defined contribution (DC)) to preserve relative incomes in retirement, even if not absolute differentials. However, moving now to the OECD statistics website, we can look at the retirement age community as a whole and compare their relative inequality with that of the working age population.

Turning to the working age population first, we can see below that the UK is a very unequal society compared to a range of rich countries, although less so than the US.

Gini working age

data extracted on 15 Aug 2014 15:52 UTC (GMT) from OECD.Stat

On the other hand, we get a very different picture if we consider the UK’s over 65 population, where the level of inequality is well below that of the US, and broadly comparable with the other major EU states.

Gini retirement age

data extracted on 15 Aug 2014 15:52 UTC (GMT) from OECD.Stat

Clearly this is not primarily down to private pension provision, but the more redistributive state pension and other benefits. However, at least the weak correlations we saw previously suggest that private pensions have not made inequality any worse and possibly slightly mitigated against it.

I think we can do better than this: after all we had inequality levels equivalent to current Norwegian levels back in the early 60s (which is why I included them in the international comparisons above). So the news that pensions tax relief is likely to be provided at a 30% rate for all after the election rather than reflecting the current tax bands is not, in my view, the cause for gnashing of teeth as the Telegraph and others believe but actually a good thing. After all, the Pensions Policy Institute have shown that 2/3rds of all tax relief is going to those earning over £45,000 pa.

One of the clear conclusions of the research carried out in The Spirit Level and elsewhere is that reducing inequality in society benefits every group in it, including those who are redistributed away from. Pension provision has its part to play in this.

And 30% tax relief does not seem like too high a price to me.

From time to time I get asked about my banner header showing successive Office of Budget Responsibility (OBR) forecasts for GDP growth against actual GDP growth and, in particular, what has happened since. The OBR produces its forecasts twice a year, in March and December, and the latest one is here. However I have resisted updating my banner to date for a number of reasons:

  • The statement that economic forecasts are wildly inaccurate has become a truism that, in my view, no longer needs additional evidence in support; and
  • To be completely honest, once actual GDP growth started to increase (as was inevitable eventually, and particularly once the Government’s austerity boot’s grip on the economy’s neck started to weaken), the graph no longer looked quite as amusing.

However, I have recently started to question the first of these assumptions so here is an updated graph:

OBR update 2014

Notice how the point at which growth peaks and starts to fall is moving closer with each new forecast. This is as much a part of their models as putting back the upward path a quarter or two with each successive forecast was while that path was still actually falling. Be assured that the OBR will not forecast the next fall before it actually happens.

What concerns me is the forecast consensus which is starting to build around 2014-2018 of GDP growth between 2% and 3% pa (currently narrowing as a forecast to 2.5% – 2.8% pa). This is despite the OBR themselves making no more than a claim of 20% probability of growth staying in this range, as the following fan chart shows:

OBR fan chart

However I don’t see this fan chart turning up in many news reports and therefore my concern is of an election campaign fought under the illusion of a relatively benign economic future. I think it is likely to be anything but, particularly as the Government is likely to stick the boot back in post election whoever wins.

There seems to be no chance of stopping the OBR and others publishing their forecasts, too many people seem to value the power of the story-telling however implausible the plot, so the only course available seems to be to rubbish them as often as we can. That way it may just be possible, despite all the noise about predictions of economic recoveries and collapses we cannot possibly foretell being used to try and claim our political support more generally, to keep in mind that we know zero. And make better decisions as a result.

Trust me. I'M AN ACTUARY!

Trust me. I’M AN ACTUARY!

I commented on the Pensions Regulator’s new code of funding in a recent post. The reason I am returning to it so soon is that a good friend of mine has pointed out a rather important, but subtle, aspect of the new code which I had missed. It goes to the heart of what we should expect from a professional in any field.

Experts and the Problem of P2C2Es

In 1990, while still in hiding from would-be assassins keen to implement Ayatollah Khomeini’s fatwa, Salman Rushdie wrote a book for his son called Haroun and the Sea of Stories. This introduced the idea of P2C2Es or Processes Too Complicated To Explain. These were how awkward things, like the fact that the Earth had a second moon which held the source of all the world’s stories, were kept hidden from ordinary people. All the people who worked on P2C2Es were employed at P2C2E House in Gup City under a Grand Comptroller. When I read it to my son a few years later I enjoyed the story of very clever people conspiring against the general public as a fairy tale.

Since 2008, it has become increasingly clear that this is no fairy tale. Whether you are looking for the cheapest quote for insuring your life, house or your car; a medical opinion about your health; an investment that meets your needs: it is a P2C2E.

Malcolm Gladwell and others make the case that expert failure is what we should really fear, when important things rely on experts not making mistakes doing things that most people do not understand. The inability to challenge expert opinion has cost us all a lot of money in the last few years. We should stay clear of P2C2Es whenever we can in my view. Professionals should present evidence and the intuitions gained from their experience, but leave the decisions to people with skin in the game.

Other professionals disagree with this. There is, from time to time, a push to get rid of juries in cases where the evidence is thought too complicated (eg fraud) or too dangerous to make public in even a limited way (eg terrorism). Some of these succeed, others don’t. There are also frequent political arguments about what we should have a referendum on, from Scottish independence (got one if you’re Scottish) to membership of the EU (one is promised) to recalling your MP mid-term (so far no luck on this one).

There is a similar divergence of opinion amongst actuaries. Since the Pensions Regulator’s first code of practice for funding was launched, in 2006, the scheme actuary’s role has been clearly set out as one of adviser to the scheme trustees and not, other than in the rare cases it was cemented in the scheme rules, a decision maker. However there are actuaries who look back wistfully to the days when they effectively set the funding target for pension schemes and all parties deferred to their expertise. I am not one of them.

Because this was really no good at all if you were a trustee expected to take responsibility for a process you were never really let in on. The arrival at a contribution rate or a funding deficit for a scheme funding on a basis presented to them as a fait accompli was to many trustees a P2C2E. We risk returning to those days with the new code of funding.

What this has to do with pensions

Compare the wording of the new Code of Practice for pension scheme funding with the previous one:

2006 code

The actuary is not passing an opinion on the trustees’ choice of method and assumptions.

2014 code

Trustees should have good reasons if they decide not to follow the actuary’s advice. They should recognise that if they instruct their actuary to certify the technical provisions and/or schedule of contributions using an approach which the actuary considers would be a failure to comply with Part 3, the actuary would have to report that certification to the regulator as the regulator considers such certification to be materially significant.

Where Part 3 refers to the funding regulations for actuarial valuations. Previously actuaries who were unable to provide the required certification of the calculation of the technical provisions or of the adequacy of the schedule of contributions had to report the matter to the regulator only if a proper process had not been followed or the recovery plan didn’t add up to the deficit. It was thought that going any further would involve passing an opinion on the trustees’ choice of method and assumptions.

Will the new code make schemes better funded? In some cases perhaps, but at the cost of moving scheme trustees into a more passive role where they do not feel the same level of responsibility for the final outcome. It is the difference between roads where cars are driven by people concerned with road safety and the ones we have where drivers are primarily concerned with not setting off speed cameras. The general level of safety is reduced in both cases, with the further danger that this passivity will trickle into other areas of trustee responsibility. And the risk to the schemes of the group think of scheme actuaries (a relatively small group of professionals who tend to all cluster around the same schedule of continuing professional development (CPD) events) is massively increased.

Ha-Joon Chang famously said never trust an economist. Is it any less dangerous to trust an actuary under these circumstances?

 

 

 

The response to the consultation on the Budget pension proposals has much to welcome in it. The Government appears to have listened to the arguments that their concerns about the impact on financial markets of the reforms bordered on paranoia, and have agreed to continue allowing private sector defined benefit schemes and funded public sector schemes to process transfers. They have committed to continuing to consult on the idea of extending the new freedoms to defined benefit schemes themselves, which would avoid the need for a lot of expensive fee-generating transfers into defined contribution arrangements.

And yet. The section on the guaranteed guidance suggests that, despite the opinions expressed in the consultation, the Government is still primarily focused on guidance “at the point of retirement” despite the probability that this is likely to become just one of the criticial retirement phases following these reforms. And the reform of pensions legislation seems overly concentrated on facilitating innovations in annuities rather than allowing the level legislative playing field between different forms of pension provision that would be required to prevent the death of defined ambition.

But the real problem I have with the consultation response concerns the minimum pension age. A point i have made before. Currently 55, the Government has decided to increase this to 57 by 2028. I think this is a mistake. Why promote freedom in the form you take your benefits but not when you take your benefits?

And the need for this freedom is evident. The latest Office of National Statistics (ONS) release on healthy life expectancy at birth by local authority suggests that, in many areas, this may condemn people to work until they are sick.

Here is the graph for males in local authorities where the healthy life expectancy (HLE) is less than the state pension age (SPA):

HLE males

And the equivalent graph for females:

HLE females

For each local authority area you need the red line to be above the minimum pension age to be 95% sure the average member of its population is able to retire, even if only partially, in good health. For the males, Blackburn, Blackpool, Islington and Tower Hamlets already have red lines below a minimum pension age of 55. Increase this to 57 and the number of red lines below multiplies alarmingly. And this is just an average – many will have life expectancies well below this.

Of course we assume life expectancy will increase between now and 2028, but healthy life expectancy? One of the problems is that it has not been measured for very long, and there have been disagreements about how it should be measured. As the King’s Fund shows, in 2005 a change to the methodology caused healthy life expectancy to plunge by 3 years, suggesting a rather optimistic approach previously. The ONS methodology is set out here.

It seems clear to me that there is sufficient doubt around how long people around the UK are expected to remain in good health for the Government to pause before raising the minimum pension age. After all we already know how those in ill health are likely to be treated if they try to claim they can’t work.

ATOS

A flower for every person that died within 6 weeks of ATOS finding them fit for work

At times it all sounds like the joke about the visitor to Hell being shown by their PR department how the bad press had been much exaggerated. There were concerts on Wednesday afternoons and coffee mornings on Fridays, the manure was only ankle deep in many places and the eternal flames were optional. However, on accepting his place for eternal damnation, another senior devil he had never seen before walked in to announce “Ok, tea break’s over. Back on your heads!”

It would seem that tea break is over.

I have written about false positives before, as have many others, but the media stories keep on coming. The latest reports, by the BBC most notably but also carried by the New Scientist and a number of other sources, display such an unfortunate ignorance of the issue of false positives that they risk raising false fears in the minds of sufferers of mild cognitive impairment and their families.

The BBC article makes a number of statements:

1. British scientists have made a “major step forward” in developing a blood test to predict the onset of Alzheimer’s disease.

2. Research in more than 1,000 people has identified a set of proteins in the blood which can predict the start of the dementia with 87% accuracy.

Neither of these statements are true. What the new test can do is guess right about patients with mild cognitive impairment (MCI) going on to develop Alzheimer’s disease (AD) within a year in 87% of cases. What it cannot do is predict whether someone with MCI will develop AD with 87% accuracy. The research article is here.

It all comes down to the likelihood of someone with MCI developing AD. It does not help that there is no general agreement of a definition for either term. The research reported on used the Petersen criterion for MCI. The likelihood of people within the population with MCI developing AD each year is again unknown, but 6 quite small studies (a total of 476 people across all the studies, with different average ages and sample sizes among the groups) carried out in North America analysed by Petersen et al in 2001 suggested that it lay between 6% and 25%, with an overall average rate of 12.5%.

So let’s assume that it is 12.5%. In a population of 1,000 people with MCI, we would expect 125 to develop AD. The test will identify 109 of them on average. Unfortunately, assuming the same accuracy rate of 87%, it will also give false positives for 13% (or 114) of the 875 not expected to develop AD in any particular year. That means that, of the 223 who test positive, less than half (49%) are actually expected to develop AD within a year. As the NHS choices website points out, in one of the few sceptical articles I could find, this is no better than tossing a coin.

If we assume the probability of moving from MCI to AD is at the higher bound of 25%, the positive predictive value (or PPV, as it is known) increases to 69%. However if we assume the lower bound of 6%, the PPV falls to 30%. In other words, if we get a positive blood test for this panel of 10 proteins, we currently do not know whether it is twice as likely to be a true positive than a false positive, or twice as likely to be false as true. Or anywhere in between.

Despite this, Dr Eric Karran, director of research at Alzheimer’s Research UK (clearly no conflict of interest there in promoting stories which promote the idea that Alzheimer’s research is highly effective) is widely reported as describing the study as a “technical tour de force”, while also acknowledging that the current accuracy levels risked telling many healthy people they were on course to develop Alzheimer’s.

In some reports it was pointed out that it was unlikely that the test would be used in isolation if it eventually made its way into clinics. A positive result could be backed up by brain scans or testing spinal fluid for signs of Alzheimer’s, they said. However if the test is no more predictive than a coin toss that is hardly encouraging.

There was more from Dr Karran: “This gives a better way to identify people who will progress to Alzheimer’s disease, people who can be entered into clinical trials earlier, I think that will increase the potential of a positive drug effect and thereby I think we will get to a therapy, which will be an absolute breakthrough if we can get there.”

This is simply untrue. Clearly it is important to support research into therapies for Alzheimer’s disease, but in raising funds for this the ends do not justify any means. Additional funding gained through false claims for any particular discovery will come at the expense of funding in other equally important areas. Like agreeing a definition of MCI and AD for instance, or better data on the transition probabilities from MCI to AD at different ages, without which a lot of the more laboratory-based research will be a waste of time as it will be unclear how best to apply it.

So let’s be careful how we report these things. People’s hopes and fears are at stake.