Relax Luther, it’s much worse than you think

On 9 April, the European Insurance and Occupational Pensions Authority (EIOPA) published the preliminary findings of the quantitative impact study on its proposed changes to the Institutions for Occupational Retirement Provision Directive (or IORP II as some have started to call it). That sentence might not mean much to many people. But once you understand that EIOPA is the pensions regulator for the whole EU and that IORP is the European word for pension scheme you will probably be expecting bad news. And you would be right.

The study showed that the combined deficits of the 6,432 defined benefit pension schemes in the UK as at 31 December 2011 would have increased from £300bn (the UK Pensions Regulator’s calculated figure) to £450bn (based on methodology designed to bring pension funding more in line with insurance company reserving).

The National Association of Pension Funds warned that this move would put a “huge burden” on remaining UK defined benefit pension schemes and the businesses that run them.  Steve Webb warned that “The EU’s latest figures show the extremely high cost its plans would place on UK defined benefit pension schemes.”

Others were less positive about the proposed changes.

However, I am reminded every time this story is reanimated by the latest stage in the unending dance of death of the European insurance and pensions legislative process, of the line Tom Cruise uses in Mission Impossible to calm objections to his scheme to break into CIA Headquarters. It really is much worse than you think.

IORP II was set in motion with 3 main aims:

  • to make cross border schemes more widely used (which are avoided by most UK employers as they require an immediate increase in funding level in most cases);
  • to create a level playing field between pensions and insurance; and
  • to make sure that this level playing field includes a common supervisory system at EU level which is risk-based.

Which all adds up to a lot more than just a new funding requirement.

Therefore, quite apart from any proposals on extra funding, in over 500 pages of advice to the European Commission last year, EIOPA recommended:

  • The same governance requirements for pension schemes as for insurers. Getting governance and the documentation of it right has and continues to be a challenge for insurers with all of the resources available to them. Can trustees of pension schemes realistically be expected to do the same?
  • Fit and proper requirements for pension scheme trustees equivalent to the requirements of boards of insurance companies. The implication is that the current trustee toolkit might not cut it any more. Might this mean the end of the non-professional trustee?
  • Similar risk management requirements for pension schemes to those of insurers. This would include the possibility of pension schemes needing to set up contingency funds for “operational risks”, eg errors made in administering the scheme that might lead to losses, for the first time.
  • The requirement to conduct an Own Risk and Solvency Assessment (ORSA) for pension schemes. Again, these are very demanding exercises for insurance companies who have whole departments devoted to conducting them.

I could go on. Unfortunately the one thing that is certain is that EIOPA will go on. They have demonstrated through the tortuous nature of the process to date that their tolerance of bureaucracy is almost unlimited. There is a principle of proportionality referred to in the recommendations, which is supposed to mean that no organisation has requirements foisted on it totally out of proportion to the risks it poses to the financial system, but this has yet to be properly tested.

My fear therefore is that what we might have assumed would be regarded as unreasonable requirements of groups of mainly volunteer trustees trying to look after member benefits in their pension schemes will be viewed by the European institutions who will vote on these recommendations as nothing of the sort.

Hopes over Experience

“IMF slashes UK growth forecast”. Does this sound familiar? It should. Every 9 or 10 months the headline seems to return to the newspapers in an almost identical form. September 2011, July 2012 and now “IMF slashes” is back this month. This occurs every time the IMF’s world economic output report (full reports every April, updates every October) happens to adjust down one of its predictions for UK growth.The latest is entitled Hopes, Realities, and Risks and is notable for its Oxford comma.

According to Stephanie Flanders, the BBC Economics Editor, the IMF rarely gives direct advice on the back of these reports, preferring to give discreet prompts. However this time the report says about the UK: “Greater near-term flexibility in the path of fiscal adjustment should be considered in the light of lacklustre private demand.”

Olivier Blanchard, the IMF’s chief economist, even singled out the UK in response to a question while launching the latest report: “There are a few countries where there is enough fiscal space to go further – one example is the UK. In the face of weak demand it is really time to consider an adjustment to the initial fiscal consolidation plans.”

So there you are, we are all doomed unless we change policy. You would imagine that an institution would have a fairly solid track record of understanding countries’ economies and making reasonably accurate predictions on the back of this expert knowledge for it to feel able to lecture us all quite so authoritatively. Unfortunately, they don’t.

As you can see, compared to the stacks of predictions the IMF have given us over the last 4 years on growth in world output alone, the actual growth figures are unfortunately fairly clearly outliers. The one thing we can take from the latest report with any confidence is that the current projections for 2013, 2014 and 2018 will not only be wrong, but probably by miles.

So it would be very difficult to justify a change in economic policy on the basis of a world economic output report. Which is a pity, because I agree that many of us will be doomed to a life of fewer opportunities and less economic independence if the current contractionary policies continue, scrabbling around for our share of a crumbling welfare state while the few of us already immunised from society by money feel very little pain at all. For a proper description of why austerity is a very bad idea, read Paul Krugman’s End This Depression Now or read his blog. Read the account of the Great Capitol Hill Baby Sitting Co-op crisis on page 26, which originally appeared in a 1977 article by Joan and Richard Sweeney. The means for ending the double dip, soon to be triple dip and probably ultimately corrugated recession are in our hands and have been known about for decades. Your spending is my income, and my spending is your income, so we need to stop contracting our economy.

And we also need to stop reading IMF reports.


NEW vs England and Wales

The land of the four score and ten and over looks a bit different from the rest of the country

My grandfather used to say that he had had his three score and ten (that’s 70 for those brought up in a decimal age) and was now quite content to die when the time came. He said this with increasing frequency and some bewilderment before his final death at the age of four score and ten in 1991. This bewilderment was understandable: there were 222,820 over 90 year olds in 1991, already over 40% up on the 1981 total. However the changes since his death have been even more dramatic, with 440,290 over 90 year olds in 2011.

The Office for National Statistics (ONS) has recently published a statistical bulletin entitled Estimates of the Very Old (including Centenarians), 2002-2011, England and Wales, which summarises how the proportions living to four score and ten and beyond have changed over the 30 years since 1981. It shows us a population living within a population: Nonagenarian (ie the over 90s) England and Wales (NEW) within the full population of England and Wales.

Imagine for a moment NEW viewed as a different country, where people are “born” as they reach 90 and we ignore (as the ONS have done in compiling these statistics) immigration and emigration.

The first thing to notice about NEW is that the age structure looks very different to that of England and Wales. We can see this by comparing the “population pyramids”, as they are known, below, with the number of people at each age shown on a graph, males to the left in blue and females to the right in red:

The numbers fall away much faster of course at the older ages, although the shape still shows the biggest falls between ages 91 and 92 reflecting the impact on birth rates at ages (in 2011) from 92 to 97 of the First World War and its immediate aftermath. There are far more women than men in NEW, although the overall ratio has reduced from 4:1 in 1981 to around 2.7:1 in 2011. By comparison, the England and Wales population is much more balanced (there are 4% more women than men). The NEW population is somewhere between the sizes of Malta’s and Cape Verde’s full population.

Your chances of living to 100 in NEW as a newly arrived 90 year old are about the same as those of a new born in England and Wales qualifying for entry into NEW one day.

The world to which NEW belongs looks very different from that which England and Wales or the UK are used to. The largest country is not China or India, but the United States. Japan, whose overall population is about a tenth that of India has an over 90 population over twice that of India’s.

Finally, the population of NEW is growing far more quickly than that of England and Wales, or indeed the UK, with a 26% increase between 2002 and 2011, almost four times the UK rate over the same period.

My grandfather only spent a few months in NEW but, by 2011, 570 people had spent over 15 years in this land. It is going to become a much more familiar place to many of us.

Actuaries and Science Fiction

Brian Aldiss told me a story the other week (at the Birmingham Science Fiction Group, where he is an honorary president) about Margaret Thatcher and her attitude towards science fiction. Kingsley Amis had been invited to a party at Downing Street and had decided to take along an inscribed copy of his latest book Russian Hide and Seek. Mrs Thatcher, a little suspicious about what she was being handed, had apparently asked what it was about.

Amis had explained that it was set in the future when the UK had been under Russian occupation for 50 years.

“Can’t you do any better than that?” the Prime Minister is reported to have said. “Get yourself another crystal ball.”

Aldiss recounted this story as he felt it illustrated how Mrs Thatcher totally misunderstood what science fiction was about. It was not about prediction of the future, but for people who “liked the disorientation” (the essence of science fiction in Aldiss’s view) of portraying an unfamiliar landscape and trying to work out what would hold true under different circumstances.

It seems to me that this is also what being an actuary is about. Actuaries are not about prediction either, but they are prepared to embrace the disorientation of asking what ifs and exploring maybes, and, by so doing, try to quantify what different currently unfamiliar landscapes might look like.

Science fiction has many forms but two main camps politically: the camp which believes a more enlightened form of society is possible (although what that means might vary considerably between different campers); and the camp which doesn’t but instead believes that all we can hope to do is survive a remorseless universe governed by nothing more than the laws of physics and evolutionary biology.

I think actuaries may have leaned more towards the second of these world views, particularly in fulfilling their statutory roles in recent years. We have worked within the remorseless universe of regulators and assumed that increasingly complex systems will make us safer in a Darwinian financial world. However the group think this has inevitably promoted has made us all less safe. As a result, we have heard many voices in the discussions about the financial crisis, including many what ifs and maybes, but few of these voices have been actuaries’. To quote Bob Godfrey (admittedly he was talking about animation at the time), the professionals are in a rut and the amateurs aren’t good enough.

Actuaries need to put themselves about as much as the amateurs do. Sometimes that will be uncomfortable. Sometimes we may look a little foolish for a while. But in my view it is the only way we are going to contribute meaningfully to the construction of a better society. And we might even produce some decent science fiction in the process.