We Know Zero

Why I Won’t Strike

20. February 2018 · 7 comments · Categories: Actuarial, Pensions

This is a piece largely written as a rebuttal to Waseem Yaqoob’s recent article on the LRB blog, entitled Why We Strike. Let me start by clearly stating that I support the University and College Union’s (UCU’s) right to strike from Thursday, and think it is ludicrous that 7 of the 68 ‘pre-92’ universities’ UCU groups need to reballot their members before they are allowed to carry out what is clearly the majority view of their members. I just think they are wrong this time.

The Joint Negotiating Committee (JNC – apologies there are lots of acronyms in this) of the Universities Superannuation Scheme (USS) is the body tasked with negotiating the pension deal struck every 3 years. It has equal numbers of members from Universities UK (UUK – representing the employers (over 390 of them)) and the UCU, with an independent chair who gets to cast the deciding vote on matters when the other JNC members are in deadlock. Just such a deadlock occurred over the future of the USS. The UCU representatives wanted to continue with some sort of defined benefit (DB) arrangement, where benefits are guaranteed, and the UUK representatives wanted to switch to defined contribution (DC), where contributions are instead paid into an invested fund for the member to secure benefits with as best they can at retirement. The chair went with the UUK position.

As a member of the USS as a result of working as a lecturer at the University of Leicester, I fervently hoped for a different outcome for purely selfish reasons. However I could not justify why I should have a DB pension (which I agree is a vastly superior option to the DC alternative being offered) when the vast majority of DB schemes are already closed, including let’s not forget the University of Leicester Pension and Assurance Scheme, which has been closed to new entrants since 2003 and to future accrual since 31 March 2016. Is it realistic or reasonable to assume that Grades 6 and above will continue to enjoy DB accrual indefinitely while Grades 5 and below don’t?

You will hear a lot about how something which is personally disadvantageous to one lecturer after another is therefore suddenly going to damage higher education irrevocably, depicting academic life as so uniquely risky that only the safety blanket of a DB pension will persuade people to do it. This is despite them not being seen as necessary in many other top global universities. For
example, the top universities in the United States mainly have DC pension schemes.

The rationale for the changes is not dubious. The vast majority of DB pension schemes follow the same funding approach as the one used by the USS which has revealed such large deficits, as was recently confirmed by research carried out by Punter Southall. Most research points to a gilts plus basis being the most appropriate for a scheme still open to future accrual.

Neither do I agree that the funding approach proposed is unduly prudent. The Government has produced a green paper, which was largely based on the report from the Commons Select Committee for Work and Pensions in December 2016, which was itself in response to what happened at Tata Steel and BHS in particular. The Select Committee report suggested legislation was needed to:

Agree changes to the indexation of pension benefits in instances where such changes are needed to make a scheme sustainable
Allow scheme members greater flexibility to take their pension as lump sums
Make recovery plans of more than 10 years exceptional (the USS currently have a recovery plan of 17 years, 14 of which are still outstanding – reducing this to 10 would considerably increase the contributions required into the scheme).

It did not focus on valuation methods particularly.

However the resultant green paper, which launched a consultation which ended in February 2017, considered 6 questions, the first of which was focused on whether current valuation measures were the right ones. Unfortunately the detailed discussion (eg in paragraph 213) was hardly encouraging to the view that the USS funding basis is too prudent and the contribution requirements too high, as it suggested that stricter interim funding targets be set for schemes which were severely underfunded and gave an example of what they meant by this as being less than 100% funded on the Pension Protection Fund (PPF) basis (this is the pensions lifeboat for schemes with insolvent employers – USS was 82% funded on the PPF basis at the last valuation).

One point where I am in agreement with Yaqoob is that the success of the strike will depend to a large extent on how students respond. I was amused by the admission that “Students have expressed solidarity with striking staff while at the same time demanding refunds for their disrupted education”. I believe that the solidarity with striking staff is due to misinformation, whereas the demand from students for refunds for their disrupted education are likely to be more long-lasting.

I have resigned my membership of the UCU as a result of this ill-conceived strike action. I urge other members who feel a similar discomfort about what they are being asked to do to consider whether they need to do the same.

Is reasonable and appropriate good enough?

15. January 2018 · Write a comment · Categories: Actuarial, Regulation

This work is licensed under a Creative Commons Attribution-NonCommercial 2.5 License.
https://xkcd.com/927/

Actuaries who are members of the Institute and Faculty of Actuaries (IFoA) have a code. Yes, one or two clients might say, it is the language which they use to deliver all of their advice in. However, the Actuaries’ Code is supposed to set out what principles govern the way actuaries (and all other members of the IFoA) conduct themselves. Launched originally in 2009 with 5 key principles, it had a light touch review in 2013 before the current consultation on a more substantive review (including a new principle). Anyone who has a view about how actuaries should behave in future can take part in this consultation, which officially closes on 17 January (although I understand that responses will be accepted for a few days after this). You don’t need to answer all of the 48 questions, in fact you can just email individual comments to code@actuaries.org.uk if you prefer. I would urge anyone with an interest to do so.

Overall it is clearly a very considered piece of work, which has caused me to think more deeply about some elements of my professional practice. The Code itself is considerably clearer than it was, removing unnecessary detail, improving the visibility of other key regulatory requirements (eg continuing professional development (CPD) obligations and the disclosure requirements under the disciplinary scheme) and structured well with very short pithy principles supplemented by amplifications (and, if necessary, further explanations in an accompanying Guide). The Actuaries’ Code Guide is a completely new document designed to explain the Code in more detail. It is currently 48 pages long, which has caused some to feel that the advantages of having a Code short enough for everyone to read may have been lost. Then again, moving the 22 pages of it which cover conflicts of interest to a separate document (which I understand is under consideration) would leave a fairly focused document. I think a Guide of some description is necessary, if only to bridge the gap between the Code and other regulations. I do however agree with those who have said the Guide should not be an IFoA document at all, to avoid any perception of a regulatory authority it does not seek.

So, all in all, a good attempt to join up the various regulations governing actuaries’ professional practice.

And yet…it may not be a light touch review, but it’s not exactly heavy touch either.

The first thing that concerns me is what is not here. Both the Code and the Guide appear to be almost entirely concerned with actuarial advice, when there is an increasingly significant body of work carried out by actuaries, particularly in non-traditional areas, which is not advice to clients at all. I work in education, where I am making judgements based at least in part on my actuarial training all the time, but I have to work quite hard to cudgel some of this wording into phrases relevant to me (I think my favourite line is Where Members identify that a user of their work has, or is reasonably likely to have, misunderstood or misinterpreted their advice, Members should draw their attention to any adverse impact, which describes an almost constant state of affairs within a university environment).

There is also nothing here about responding to the impact of automation on the profession. There are many concerns which flow from this, but consider one scenario: increasingly capable artificial intelligence systems, with access to far more data than any individual doctor could possibly take into consideration in making a diagnosis, will be able to offer advice and treatments to patients with better outcomes than even the top practitioners in a given field, and with far more reliable outcomes. According to Daniel Susskind, this is already starting to happen. However, as Cathy O’Neill points out, this increased reliability has immediate outcomes in a health insurance environment:

Just imagine, though, what insurance companies will do with the ability to better predict people’s health care costs. If the law allows, they will increase prices for the riskiest customers to the point where they can’t afford it and drop out, leaving lots of relatively healthy people paying more than they’re expected to cost. This is fine from the perspective of the insurer, but it defeats the risk-pooling purpose of insurance. And in a world of increasingly good predictive tools, it will get progressively worse.

If we do not have any principles in our Code which require us to take account of such considerations, and a direction of travel of increased privatisation of the NHS, what is to stop us actively conniving in such an outcome?

A principle like run your business or carry out your role in the business in a way that encourages equality of opportunity and respect for diversity would be one possibility (courtesy of the code of conduct from the Solicitors Regulation Authority). Another possible approach would be to require individual members to take account of the public interest, using the same professional judgement required to interpret the rest of the Code. It is therefore unfortunate that the IFoA should also have taken this opportunity to point out to members that they have no individual responsibility for such considerations. I strongly disagree with this, a move which was initially a response to the appeal against the ruling against the Phoenix Four. An appeal tribunal that overturned eight of the charges levied against Deloitte criticised the ICAEW for the lack of clarity in its guidance about how accountants should act in the public interest. It seems appalling to me that we would retreat from taking individual responsibility in this area altogether on the back of this.

But what about the new principle that has been added: Speaking Up? There has been some discussion about whether the requirement to speak up has been widened by the phrase Members should challenge others on their non-compliance with relevant legal, regulatory and professional requirements. I am not sure that this will lead to a large increase in whistleblowing in the profession, but I do think that the principle expresses expectations of members much more clearly now and this may have an impact on behaviour. What it doesn’t do is broaden the considerations under which speaking up can take place.

However I think the biggest weakness of the new Code, which undoes a lot of the clarity found elsewhere, may turn out to be the extensive use of just two words. “Appropriate” or “appropriately” turn up four times and the words “reasonable” or “reasonably” nine times. This suggests a shared view of the meaning of these words which I would question exists in a Code which “has no geographic restrictions and applies to Members in all locations and in relation to work carried out in respect of any part of the world”. The IFoA feels it knows what these words mean and doesn’t need to explain them. I think that individual professional judgement would be better applied to interpreting on a daily basis a clear description of what the IFoA means by appropriate and reasonable. That would certainly lead to a narrower range of outcomes, which ultimately has to be the point of any Code.

We are paying too much attention to the wrong actuaries’ index

03. September 2017 · Write a comment · Categories: Actuarial, Climate Change, Economics, Prediction, Risk

The FTSE All-Share Index, originally known as the FTSE Actuaries All Share Index, along with the FTSE 100, represent nearly all of the market capitalisation and the top 100 companies by size listed on the London Stock Exchange respectively. They are mentioned in all BBC news bulletins. When they go up, we all feel better. When they go down, they are seen as portents of doom.

Let me show you a different actuaries’ index instead:

Figure 1 shows the ACI and each of the components. The composite ACI represents the average of the six components (with sign of change in cool/cold temperatures reversed). The ACI is increased by reduction in cold extremes, consistent with increased melting of permafrost and increased propagation of diseases, pests, and insects previously less likely to survive in lower temperatures. A positive value in the ACI represents an increase in climate-related extremes relative to the reference period.

The threat of climate change is real, independent of speculative trading and the news media cycle, and increasing with each degree of warming we are unable to stop. Alongside this are the increasing risks of extreme weather events, which is most neatly described for North America currently by the Actuaries Climate Index. This focuses on six components in particular which have the most impact on human societies:

Frequency of temperatures above the 90th percentile (T90);
Frequency of temperatures below the 10th percentile (T10);
Maximum rainfall per month in five consecutive days (P);
Annual maximum consecutive dry days (D);
Frequency of wind speed above the 90th percentile (W); and
Sea level changes (S).

It then tracks them all over time, as shown in the graph above.

It seems clear to me that we should be reacting much less to the booms and busts of economic cycles and much more to climate-related threats. This is for two main reasons:

1. More people are at threat of death or injury as a result of climate change than even the 2008 crash in our financial systems. The World Health Organisation (WHO) predicts that, between 2030 and 2050, climate change is expected to cause approximately 250,000 additional deaths per year, from malnutrition, malaria, diarrhoea and heat stress. However, the additional deaths are already here. Taking just two examples from the WHO:

In the heat wave of summer 2003 in Europe for example, more than 70,000 excess deaths were recorded, with the frequency of such events steadily increasing.
Globally, the number of reported weather-related natural disasters has more than tripled since the 1960s. Every year, these disasters result in over 60,000 deaths, mainly in developing countries, which means that 40,000 of those deaths pa can already be directly attributed to climate change.

On the other hand, the 500,000 additional cancer deaths and 10,000 additional suicide deaths since 2008 cannot be attributed directly to the 2008 crash, as the analysis shows. These are more a result of the austerity policies which have been applied since 2008. Unnecessarily.

Climate change on the other hand does not care whether we react to it or not. It will relentlessly change the chemistry and biology of everything around us as the Earth and the inhabitants of the Earth adapt. We may survive it, in reduced numbers, or we may not. The Earth does not care. Responding to the threat will not make more climate-related events happen unless our response is to, by and large, ignore it.

2. One depends on the other. We cannot base our economies on a FTSE-led GDP-growth-at-all-costs model because it is not physically possible to maintain it without losing the environment from which our growth originates. As Finbarr Livesey points out in his excellent From Global to Local, the circular economy which the overwhelming consensus of studies show would increase employment and contribute to economic growth is taking a long time to arrive. In Europe, where we consume around 16 tonnes of stuff each per year, figures from Siemens in 2016 suggest that 95% of it and its energy value is lost through the life cycle of the products themselves. As Kate Raworth and others have pointed out, we need to focus on different measures of success if we are going to direct our economies in a more sustainable, less volatile and doom-laden direction.

There are plans to extend the Actuaries Climate Index to Europe (including the UK in this instance!), with a recent feasibility study concluding “that the prospects for constructing an analogue to the Canada-US ACI over the European region are promising”. I hope we see such an index soon, because, as Randall Munroe illustrates here, we have not been here before.

I look forward to the day when a new global actuaries’ climate index is on every news bulletin, making us feel better when it goes down and seeing any rise as a portent of doom. Because this time it really would be.

Global Warming Scenarios

21. August 2017 · Write a comment · Categories: Climate Change, Prediction, Risk

Great infographic from futurism.com summarising the likely impacts of each additional degree in warming which I thought was definitely worth sharing!

https://futurism.com/?p=92586&post_type=image

What if we made the State Pension Age irrelevant?

19. August 2017 · Write a comment · Categories: Actuarial, Cartoons, Pensions, Regulation

There has been a lot written about the State Pension Age (SPA) in the UK in the last year. This was primarily because the UK Government has been carrying out its first periodic review of the SPA. John Cridland was asked to carry out an independent review of the State Pension Age, which reported in March this year with over 150 responses received and 12 recommendations made plus a proposal for an auto enrolment review. This was followed by the Secretary of State for Work and Pension’s report on the first Government review of State Pension age, as required under the Pensions Act 2014 last month, in which Cridland’s central recommendations on the timetable for SPA change were accepted, ie:

The State Pension age should continue to be universal across the UK, increasing over time to reflect improvements in life expectancy.
The State Pension age should increase to age 68 between 2037 and 2039.
The State Pension age should not increase by more than one year in any 10-year period (assuming there are
no exceptional changes to the data used).
Individuals should get 10 years’ notice of any new changes to State Pension age.

However the report was noticeably silent about Cridland’s other recommendations, including:

that means-tested access to some pension income will remain at 67 and will continue to lag a year behind for rises thereafter.
that the conditionality under Universal Credit should be adjusted for people approaching State Pension age, to enable a smoother transition into retirement.
supporting working past State Pension age
to do more to help carers in the workplace:
the provision of a Mid-life MOT
support for the use of older workers as trainers

Other commentators have given their analysis, some, like the Work and Pensions Parliamentary Select Committee, have pointed out that many people will not live to see the new SPA, something rather lost in the massive groupings Cridland referred to where the lowest average was across a group titled “Routine”. These were described as socio-economic groupings but seemed in reality to be more occupational. There is some reference to healthy life expectancy, but no attempt to quantify how this varies by population. It therefore gives the rather misleading average of around 10 years of healthy life expectancy at age 65 for both men and women.

Contrast this with the Office of National Statistics’ (ONS) rather more comprehensive look at the subject and, in particular, these graphs:

The graphs are more encouraging for women in terms of life expectancy, but no more encouraging for healthy life expectancy.

Other commentators such as the OECD have suggested that the top 5-10% wealthiest stop receiving it altogether to allow it to be more generous for everyone else. The most prominent actuarial view so far has probably come from Paul Sweeting, who proposes a means tested approach to paying state pension which allows the pace of SPA increase to be slower but at the same cost. While I share most of Paul’s analysis of the problem, I do not share his conclusion that the only solutions are faster increases to the State Pension Age, or means testing. My problems with means testing as opposed to universal benefits boil down to two main objections:

People will not contribute to other savings vehicles if they think these will just reduce benefits elsewhere. This was how the Minimum Income Guarantee killed the Stakeholder Pension.
Many people do not claim means tested benefits which they are entitled to. Whether through pride or fear of the dauntingly long forms the DWP produce for any claimed benefit or a combination of the two, a study in 2003 indicated that 1 in 6 people did not claim benefits representing over 10% of their total income.

I therefore think there has to be another way, and I think it might be a form of universal basic income (UBI). Compass have produced one of the more recent reports on the feasibility of this, and there are many different forms, with full schemes or pilots now running mainly at a regional level at present in the United States, Canada and India amongst other countries.

The basic features of most of these schemes are that the personal allowance is abolished in favour of a regular income paid to everyone, perhaps with different rates at different ages but not means tested. Different schemes make different adjustments to existing taxes and maintain different combinations of existing benefits, both means tested and universal. Compass have modelled five possible schemes, and believe that paying a lower UBI but leaving in place the current means-tested benefits system while reducing households’ dependence on means testing by taking into account their UBI when calculating them may be a feasible way forward.

The main arguments for a UBI approach are:

it would directly address most of the inequality of outcomes discussed above, particularly the decile likely to be condemned to 18 years of work in ill health and a retirement of 4 years by 2037 unless both their life expectancy and healthy life expectancy increase, at exactly the time when both appear to be slowing (at the 0.4 months pa rate of improvements since 2011, these expectancies would only have increased by 8 months by 2037)
by providing a guaranteed minimum income, the safety net we provide as a society would be much more robust, and that reducing the reliance on means testing would tackle the problems of take up and the inevitable poverty traps which means testing creates
people could choose to work less and have more time for other things (although previous experiments suggest this number would be small), alternatively it would make retraining much easier
people would have more bargaining power in the labour market, which is clearly problematic in the UK in particular, with the stagnation of real wages for a considerable period now

Many people think their jobs are useless and that they are trapped in them with no marginal income to let them transition to something more meaningful. Neither does it seem as if getting everyone into work is good for us physically, further exacerbating the healthy life expectancy problem at lower deciles.

I am therefore surprised that there is not more research into feasible UBI schemes. The reference section at the back of the Compass report was shorter than that in many of my 3rd year undergraduate dissertations, and yet it is clearly an area in urgent need of some modelling. Anyone out there fancy joining me in a working party to look at this?

If providing risk information is ineffective in changing behaviour, why do we do so much of it?

22. July 2017 · Write a comment · Categories: Actuarial, Regulation, Risk

Oceanic whitetip shark. (2014, August 29). Wikipedia, The Free Encyclopedia. Retrieved
11:13, July 22, 2017
from https://simple.wikipedia.org/w/index.php?title=Oceanic_whitetip_shark&oldid=4875771.

Changing people’s behaviour is hard. Even if we have agreed that it needs to change, actually acting on this new knowledge is hard enough, but getting that agreement in the first place by shifting our beliefs is even harder.

It gets worse. The research suggests that providing risk information is ineffective in changing behaviour. You might need to read that again before it sinks in: risk information is ineffective in changing behaviour.

Professor Theresa Marteau, Director of the Behaviour and Health Research Unit at the University of Cambridge, and her team have been looking at the four behaviours responsible for the majority of premature deaths worldwide: smoking, eating too much, drinking too much (alcohol) and moving too little. The original focus of their work concerned how people responded to genetic test results indicating a greater predisposition to diabetes, cancer and other diseases. What they found is that the genetic test may get someone past the first barrier, ie agreeing that they need to change their behaviour, but not the second part, ie actually doing it.

As Marteau says: Few of us would swim in waters signed as shark-infested. On the other hand, when the risk of future disease is up against the pleasures of current consumption, it doesn’t tend to compete very well. Marteau summarises their findings as follows:

Put simply, we overestimate how much our behaviour is under intentional control and underestimate how much is cued by environment.

In my view, this research is directly applicable to the financial services industry and explains a lot of behaviours which have up until now often been considered as separate rather than related problems, eg:

The failure of consumers to shop around adequately in the annuities and investment markets (we know we should but get easily discouraged by the difficulty of the process);
The stampede to take transfer values out of defined benefit pension schemes (the possibility of immediate consumption trumping deferred gains); and
The surge in the tax take at HMRC caused by people removing all of their cash from defined contribution pension schemes (same again).

Turning to my own profession for a moment, and looking on the Become an actuary part of the Institute and Faculty of Actuaries website, we find: Actuaries use their skills to help measure the probability and risk of future events. A little further on we find: It is essential that actuaries have excellent communication skills to enable them to communicate actuarial ideas to non-specialists in a way that meets the needs of the audience.

So, in a nutshell, producing risk information and then communicating it.

As a pensions actuary, I spent most of my time overseeing calculations which underpinned reports to clients which I would then summarise in presentations in order to get them to move a little bit further towards fully funding their pension schemes than where they were starting from. And then we had to condense the whole of that process into a single meeting where we tried to persuade the people who were actually doing the funding as part of the negotiation of the final deal. While, unconsciously, I am sure that just my presence was having some kind of placebo or nocebo effect, all of my conscious effort was directed on providing risk information and communicating it.

And actuaries are not alone in focusing on the provision of risk information as the most important element in guiding consumer behaviour. From the Financial Conduct Authority’s Retail Distribution Review, to the Pensions Advisory Service and Pension Wise, we are obsessed with it.

However if we are going to really change behaviour in response to the many risks these consumers face, we need to be spending much less time on producing risk information (which coincidentally may be done for us in the future by increasing capable machines anyway)and much more time focusing on the design of the financial environment we all operate within.

But if changing the environment is so much more effective for changing behaviour, perhaps what we need is a framework of standardised definitions to characterise any interventions we make. Fortunately the social scientists are way ahead of us on this and have produced just such a framework. TIPPME (typology of interventions in proximal physical micro-environments) has been developed and demonstrated by applying it to the selection, purchase and consumption of food, alcohol and tobacco. As the authors state: This provides a framework to reliably classify and describe, and enable more systematic design, reporting and analysis of, an important class of interventions. This then allows evidence to be collected into what works and what doesn’t in changing behaviour across populations.

Our physical health and what interventions cause us to look after it better are thought sufficiently important for a coordinated approach to designing the risk environment, rather than the piecemeal legislation and partial solutions offered by commercial providers we have had to date, to be worthwhile. I would suggest that our financial health needs to be given similar consideration. This looks like a promising way forward that could result in truly evidence-based financial regulation, with the prospect of lasting change to the way we help consumers navigate a path through the financial seas. Far away from the sharks.

The future for actuaries

20. May 2017 · Write a comment · Categories: Actuarial, Prediction, Regulation

https://imgs.xkcd.com/comics/the_three_laws_of_robotics.png
This work is licensed under a Creative Commons Attribution-NonCommercial 2.5 License.

Daniel and Richard Susskind in their book “The Future of the Professions” set out two possible futures for the professions. Either:
• They carry on much as they have since the mid 19th century, but with the use of technology to streamline and optimise the way they work
• Increasingly capable machines will displace the work of current professionals

Their research suggests that, while these two futures will exist in parallel for some time, in the long run the second future will dominate. The actuarial profession is particularly vulnerable. As the Susskinds write:

Accountants and consultants, for example, are particularly effective at encroaching on the business of lawyers and actuaries.

Actuaries both here and in other countries are waking up to what is coming, but the response of the profession is a whole has been quite slow.

For the actuarial profession, we will see the extension of some trends which have already begun, eg:

Automation of processes not just leading to greater efficiencies but reconfiguring both what work is done and how it is done, eg propensity pricing and pensions valuations
Para professionalization, like CAA Global for instance
Globalisation
Specialisation
Mergers of businesses as markets consolidate
Flexible self employment

And the emergence of trends that have hardly started at all yet, eg:

The end of reserved roles for actuaries
Different ways of communicating advice (Richard Susskind got into trouble with the Law Society in the mid 1990s for suggesting that most legal communication between lawyers and their clients would be delivered via email in the future, which would strike us as an obvious observation now)
Online self-help for users of actuarial advice (ask discussed by the Pensions Policy Institute in their report last year)
The advance of roboactuaries and their assistants

Focusing on the last of these, a paper produced by Dodzi Attimu and Bryon Robidoux for the Society of Actuaries in July 2016 explored the theme of robo actuaries, by which they meant software that can perform the role of an actuary. They went on to elaborate as follows:

Though many actuaries would agree certain tasks can and should be automated, we are talking about more than that here. We mean a software system that can more or less autonomously perform the following activities: develop products, set assumptions, build models based on product and general risk specifications, develop and recommend investment and hedging strategies, generate memos to senior management, etc.

They then went on to define a robo actuarial analyst as:

A system that has limited cognitive abilities but can undertake specialized activities, e.g. perform the heavy lifting in model building (once the specification/configuration is created), perform portfolio optimization, generate reports including narratives (e.g. memos) based on data analysis, etc. When it comes to introducing AI to the actuarial profession, we believe the robo actuarial analyst would constitute the first wave and the robo actuary the second wave

They estimate that the first wave is 5 to 10 years away and the second 15 to 20 years away. We have been warned.

One of the implications of this would be far fewer actuarial students required and, in my view, a much smaller appetite amongst actuarial firms for employing students while they were sitting actuarial examinations, particularly the core rather than specialist ones. This in turn would suggest an expansion of the role of universities in supporting students through these stages of their actuarial education, massively increasing the IT and data analysis skills of the next generation of actuarial students and developing far more opportunities for students to develop skills more traditionally seen as “work-based”, such as presentation, project management and negotiation skills. Some universities, such as my own at the University of Leicester, are using the preparatory work in anticipation of the Institute and Faculty of Actuaries’ launch of Curriculum 2019 to do all of these things.

But universities and the education professionals in general face their own challenges from the rise of technology and increasingly capable machines:

The development of learning labs offering personalised learning systems
Online education networks, like Moodle, once used just to support traditional university teaching activities, but now starting to actively supplant them
Other online education platforms, like the Khan Academy
The rise of Massive Open Online Courses or MOOCs. For instance, more people have signed up to Harvard University’s MOOCs in one year than have enrolled at the University in its 377 year history

The actuarial profession and the higher education sector therefore need each other. We need to develop actuaries of the future coming into your firms to have:

great team working skills
highly developed presentation skills, both in writing and in speech
strong IT skills
clarity about why they are there and the desire to use their skills to solve problems

All within a system which is possible to regulate in a meaningful way. Developing such people for the actuarial profession will need to be a priority in the next few years.

Of course it is still possible to laugh at what Artificial Intelligence and Machine Learning (here and here) have not managed to do yet, despite their vast ambitions. But it should not blind us to the fact that those ambitions will be realised in our working lifetimes in many cases. And we need to start preparing now.

Actuaries and Climate Change

30. April 2017 · Write a comment · Categories: Actuarial, Climate Change, Demographics, Legal, Pensions, Prediction, Risk

The Institute and Faculty of Actuaries (IFoA), through its Actuarial Research Centre, is inviting research teams and organisations to submit proposals for a research project on modelling pension funds under climate change. The research is intended to address the need for pensions actuaries to understand the potential magnitude of climate change impacts, and hence if and when climate change might be relevant to the funding advice they give. What areas in particular might be useful to look at through the lens of a pension actuary?

The current concentration of carbon dioxide in the Earth’s atmosphere is around 400 parts per million by volume (ppmv), or a little over 140% of the generally accepted pre-industrial level of 280 ppmv. What level we can cap this at depends on how we respond in every country in the world. There are therefore many opinions about it:

Source: IPCC AR5: Fig 2.08-01

Here RCPs stand for Representative Concentration Pathways, and are meant to be consistent with a wide range of possible changes in future anthropogenic (i.e. human) greenhouse gas emissions. RCP 2.6 assumes that emissions peak between 2010-2020, with emissions declining substantially thereafter. Emissions in RCP 4.5 peak around 2040, then decline. In RCP 6.0, emissions peak around 2080, then decline. In RCP 8.5, emissions continue to rise throughout the 21st century. What this means is that the best we can hope for now is a scenario somewhere between RCP 2.6 and RCP 4.5, with the US Government’s Environmental Protection Agency appearing to believe that RCP 6.0 is the most realistic scenario. As you can see, RCP 4.5 assumes an eventual equilibrium at around 500 ppm, or about 180% of pre-industrial levels and RCP 6.0 an equilibrium at around 700 ppmv, or about 250% ppmv.

Equilibrium climate sensitivity is defined as the change in global mean near-surface air temperature that would result from a doubling of carbon dioxide concentration. A doubling of the pre-industrial level to 560 ppmv (ie between the RCP 4.5 and RCP 6.0 assumption) has been projected to result in a range of possible outcomes:

Source: IPCC 2007 4th Assessment Report, Working Group 1 (Figure 9-20-1)

This is certainly a bit of a we know zero kind of graph, but has worryingly fat tails indicating reasonable chances of 10 degrees plus added to average global temperatures. To put this in context, let’s use the approach taken in Mark Lynas’ excellent “Six Degrees“, where the combined research into the effects of each additional degree above pre-industrial global temperatures is collated to allow us to view them as distinct possible futures. Some examples are as follows:

One degree

We are nearly here (around 0.8ᵒ so far):

Return of the “Mid-west American dust bowl” but with greater vengeance
Increase in hurricane activity
Loss of low lying islands, eg Tuvalu

Two degrees

The “safe” level we are trying to limit increases to:

Release of greenhouse gases begin to alter the oceans. May render some parts of southern oceans toxic to Ca CO3 and thus to one of life’s essential building blocks, plankton.
Heatwaves like 2003 which killed 35,000 people in Europe and led to crop losses of $12 billion and forest fires costing $1.5 billion will occur almost every other summer.
Crippling droughts can be anticipated in Los Angeles and California
From Nebraska to Texas the anticipated drought would be many times worse than the 1930s “dust bowl” phenomenon.
Polar bears would probably become rapidly extinct.
Mediterranean countries will become drier and hotter with significant water shortages.
IPCC estimate sea level rise of 18 to 59 cms.
Monsoons would increase in India and Bangladesh leading to mass migration of its populations.
International food price stability will have to be agreed to prevent widespread starvation.

Three degrees

Africa will be split between the north which will see a recovery of rainfall and the south which becomes drier. This drier southern phase will be beyond human adaptation. Wind speeds will double leading to serious erosion of the Kalahari desert.
Indian monsoon rains will fail. ·
The Himalayan glaciers provide the waters of the Indus, Ganges and Brahmaputra, the Mekong, Yangtze and Yellow rivers. In the early stages of global warming these glaciers will release more water but eventually decreasing by up to 90%. Pakistan will suffer most, as will China’s hydro-electric industry.
Amazonian rain forest basin will dry our completely with consequent bio-diversity disasters
Australia will become the world’s driest nation.
New York will be subject to storm surges. At 3° sea levels will rise to up to 1 metre above present levels.
In London, a 1 in 150 year storm will occur every 7 or 8 years by 2080.
Hurricanes will devastate places as far removed as Texas, the Caribbean and Shanghai.
A 3° rise will see more extreme cyclones tracking across the Atlantic and striking the UK, Spain, France and Germany. Holland will become very vulnerable.
By 2070 northern Europe will have 20% more rainfall and at the same time the Mediterranean will be slowly turning to a desert.
More than half Europe’s plant species will be on the “red list”
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. US southern states worst affected, Canada may benefit. The IPCC reckons that a 2.5° temperature rise will see food prices soar.
Population transfers will be bigger than anything ever seen in the history of mankind.

Three degrees obviously needs to be avoided, let alone ten, but the problem is that business as usual for the finance industry may not be the way to get there. As some recent research has suggested, financial market solutions to environmental problems, such as carbon trading, may be ineffective. As the authors state: By highlighting the tenuous and conflicting relation between finance and production that shaped the early history of the photovoltaics industry, the article raises doubts about the prevailing approach to mitigate climate change through carbon pricing. Given the uncertainty of innovation and the ease of speculation, it will do little to spur low-carbon technology development without financial structures supporting patient capital.

Patient capital is something developed economies have been seeking for some time, whether it is for infrastructure investment, development projects or new energy sources, and no good way to create it within the UK private sector has been found yet, including various initiatives to try and get an increase in pension scheme investment in infrastructure projects. It therefore seems to me to be the wrong question to ask what impacts climate change are likely to have on the assumptions used for pension scheme funding, when it is the impact of the speculation which pension scheme funding encourages which is one of the main drivers of our economies towards the worst possible climate change outcomes.

A more productive research question in my view would be to bring in legislators and pensions lawyers as well as environmental scientists and others researching and thinking in this area alongside actuaries to look at how we could change the regulatory framework within which pension scheme funding and investment within other financial institutions where actuaries are central takes place. There is already research into what changes may be necessary to international law to reflect the new Anthropocene era the planet has entered, where the dominant feature is the impact of human activity on the environment. In my view this should be extended to the UK legislative and regulatory landscape too.

Pensions and the Zombie Apocalypse

12. March 2017 · Write a comment · Categories: Actuarial, Demographics, Economics, Pensions

If the models are correct we are heading for a Zombie Apocalypse

Let’s forget the strapline of this blog for a moment and assume that the models are correct. The Pension Protection Fund (PPF) is targeting “self-sufficiency” by 2030, ie no more levies from sponsors of pension schemes required for it to independently fund all the future benefits of every scheme member whether they are already in the PPF or going to end up in it with only the insufficient assets their former employers allocated to their former pension schemes for company. BHS has concluded a very high profile deal in the last couple of weeks to set up a new self-sufficient scheme for its former employees. The Universities Superannuation Scheme (USS) has proposed a funding plan which targets self-sufficiency less a “covenant” (ie amount of money feasible to get out of the university sector in the future) by 2031. John Ralfe mentioned a few other examples in his article from 2015.
These are schemes which have been dubbed “zombie” schemes on the basis that they are basically dead, with no new money or new members coming in, but nevertheless dragging themselves along the floor year after year until all of their members have stopped twitching.
What does the UK pensions world look like in 2030? Well according to various sources:
• UK population will have increased to 70.6 million (assuming Scotland and Northern Ireland are still in it) with 21.4% of them over the age of 65 (S&P)
• Credit rating of UK will have fallen to A, with a further fall to BBB by 2035 assuming no change in economic policy (also S&P)
• Average life expectancies at birth in UK would be over 85 for women and 82.5 for men (Imperial College and WHO)
• Benefit outgo from defined benefit pension schemes is £100 billion more than contribution income pa (Hymans Robertson)

This does not sound like a happy place for our zombies to be negotiating with the occasional limb getting torn off as multiple doors are slammed in their faces. Although the self-sufficiency route is now a common approach amongst large schemes, it is largely untested. No scheme as far as I am aware has actually managed to run in a self-sufficient manner for any appreciable length of time, whereas the more expensive buy out route (where the benefits for members are purchased in the form of contracts with an insurer) is by comparison well established.

So off into this volatile landscape our zombies will be let loose, trying to run themselves like little insurance companies, but without the scale or diversification or experience which makes insurers (mostly) survive for long periods. However that better track record comes at a price which schemes are currently reluctant to pay. There is a good chance that this experiment will not end well.

My guess for 2030? That the volatile landscape will have claimed some casualties amongst the self-sufficient zombies and put them into the PPF with much bigger deficits than if they had gone there straight away. And then all the other zombies will T-U-R-N A-R-O-U-N-D V-E-R-Y S-L-O-W-L-Y and follow them there. At which point the PPF will realise that they are undead no longer.

Actuaries and the New Manhattan Project

01. October 2016 · Write a comment · Categories: Actuarial, Regulation

Public.Resource.Org SI Neg. 2001-1900. Date: na…Oblique aerial view from approximately 12,000 feet, 50 miles from the detonation site, two minutes after the detonation of a hydrogen bomb during an unidentified US atomic weapons test, circa 1950s. At this point in time, the mushroom cloud rose to 40,000 feet…Credit: Unknown USAF photographer. (Smithsonian Institution)

I have just started reading an excellent new book by Cathy O’Neil, Weapons of Math Destruction, where she sets out the case against devolving important decisions to mathematical models without adequate feedback loops. The opening example she gives, of a teacher fired from her job in Washington because a school feeding students into her school was manipulating test scores, makes her general point very well. I am looking forward to the chapter on insurance.

However, the thought that this raised in my mind is how, increasingly, we don’t even need the algorithms and mathematical models to behave in a robotic fashion – we constantly follow rules set by others rather than using our own judgement. Indeed regulators push us more and more in this direction. They are nearly all under-staffed and over-tasked and need shortcuts to manage their workloads. And the most obvious shortcut is to focus on the very big and the very different. The very big are normally very much better staffed than the regulators and difficult to win arguments with. Regulators are therefore left with the very different. So regulators make life for the very different very difficult. And, before long, the very different no longer exist and the systemic risk in your population of banks, schools, hospitals or whatever it is has increased.

What O’Neill rightly focuses on as the main danger of widely used models is their lack of a feedback loop. If nothing tells you when your model is not reflecting the world it is modelling, it will not be long before it is doing a great deal more harm than good. And when a regulators uses a model which does not rely on inputs from the system it is regulating, then the model becomes the world it is regulating, often with bizarre consequences. One of the main reasons that the 2008 crash was so dramatic is that so little was done to prevent it even as warning signs grew. This was because, in the model used to regulate banks, these warning signs didn’t exist. Unfortunately and worryingly for us, the lessons learned, in the main, were not that model-led regulation was bad, but that the models used just needed to be more complicated.

Every call for what is being regulated to be simplified (by breaking them up into smaller units, in the case of banks, or simplifying the regulations themselves, rather than the regulatory arms race of measure and unintended loophole we seem doomed to keep repeating) has been resisted, resulting in a regulatory framework which becomes more bafflingly complex with every passing year. This is a process recognised in Government and there have been occasional attempts to reverse the tide. To date, with little effect.

And the regulators themselves? They are cash-strapped and at the mercy of inconsistent Government policy. So we have CQC inspectors (of NHS Trusts) and Ofsted inspectors (of schools and colleges) making short visits, producing reports based on anything anyone has said to them on these short visits, allowing for no factual corrections, subject to no cross examination, just to get through their caseloads without causing headaches for their political masters, but often resulting in inconsistent scrutiny or, in some cases, in abrupt reversals in conclusions in successive inspections. At the same time, it appears clear that you can evade your financial responsibilities almost completely if you are rich and unscrupulous enough. Our regulatory systems have proved unreliable in too many areas and have in my view lost credibility as a result.

So where do actuaries fit in to all this? They are one of the professions centrally involved in building, updating and interpreting models across a wide range of financial firms. Everything from the amount a firm makes in pension contributions, to the amount held in reserve by an insurer or a bank, to the detailed agreements in a corporate restructure, often involving staggering sums of money. This work cannot be carried out effectively by playing to an unreliable regulator.

Upon accepting the Army-Navy Excellence Award on November 16, 1945, Robert Oppenheimer, who ran the US Government’s Manhattan Project in Los Alamos to develop the world’s first nuclear weapons, proclaimed: “If atomic bombs are to be added as new weapons to the arsenals of a warring world, or to the arsenals of the nations preparing for war, then the time will come when mankind will curse the names of Los Alamos and Hiroshima.” He realised that responsibility for the use to which your work is put can never be wholly given away to someone else.

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