{"id":1366,"date":"2019-05-01T13:03:04","date_gmt":"2019-05-01T13:03:04","guid":{"rendered":"http:\/\/weknow0.co.uk\/?p=1366"},"modified":"2025-11-27T15:36:24","modified_gmt":"2025-11-27T15:36:24","slug":"dr-strangeloves-pension","status":"publish","type":"post","link":"https:\/\/weknow0.co.uk\/?p=1366","title":{"rendered":"Dr Strangelove&#8217;s Pension"},"content":{"rendered":"<div id=\"attachment_1365\" style=\"width: 639px\" class=\"wp-caption alignnone\"><a href=\"https:\/\/weknow0.co.uk\/wp-content\/uploads\/2019\/04\/Dr._Strangelove_-_The_War_Room.png\"><img loading=\"lazy\" decoding=\"async\" aria-describedby=\"caption-attachment-1365\" class=\"size-full wp-image-1365\" src=\"https:\/\/weknow0.co.uk\/wp-content\/uploads\/2019\/04\/Dr._Strangelove_-_The_War_Room.png\" alt=\"\" width=\"629\" height=\"472\" srcset=\"https:\/\/weknow0.co.uk\/wp-content\/uploads\/2019\/04\/Dr._Strangelove_-_The_War_Room.png 629w, https:\/\/weknow0.co.uk\/wp-content\/uploads\/2019\/04\/Dr._Strangelove_-_The_War_Room-300x225.png 300w\" sizes=\"auto, (max-width: 629px) 100vw, 629px\" \/><\/a><p id=\"caption-attachment-1365\" class=\"wp-caption-text\"><em>The War Room with the Big Board from Stanley Kubrick&#8217;s 1964 film, &#8221;Dr. Strangelove&#8221;. Source: &#8221;Dr. Strangelove&#8221; trailer from 40th Anniversary Special Edition DVD, 2004 Directed by Stanley Kubrick<\/em><\/p><\/div>\n<p>In 1960, Herman Kahn, a military strategist at the <a href=\"https:\/\/www.rand.org\/about\/history\/a-brief-history-of-rand.html\">RAND Corporation<\/a>, an influential think tank which continues to this day, wrote a book called <a href=\"https:\/\/www.amazon.co.uk\/Thermonuclear-War-Herman-Kahn\/dp\/141280664X\"><em>On Thermonuclear War<\/em><\/a>. It focused on the strategy of nuclear war and its effect on the international balance of power. Kahn introduced the Doomsday Machine (which Kubrick used in his film &#8220;Dr Strangelove&#8221; alongside many other references from the book) as a rhetorical device to show the limits of John von Neumann&#8217;s strategy of mutual assured destruction or MAD. It was particularly noteworthy for its views on how a country could &#8220;win&#8221; a nuclear war.<\/p>\n<p>For some reason Kahn came to mind as I was looking through <em>Resource and Environment Issues: A Practical Guide for Pensions Actuaries<\/em>, from the Institute and Faculty of Actuaries&#8217; Relevance of Resource and Environment Issues to Pension Actuaries working party, which summarises the latest thinking on the climate change-related issues scheme actuaries should be taking into consideration in their work. I will come back to why.<\/p>\n<p>The section which particularly caught my attention was called <em>How might pensions actuaries reflect R&amp;E issues in financial assumptions? <\/em>This section introduces two studies in particular. First, we have the University of Cambridge Sustainability Leadership (CISL) <a href=\"https:\/\/www.cisl.cam.ac.uk\/resources\/publication-pdfs\/unhedgeable-risk.pdf\">report<\/a> on <em>Unhedgeable risk: How climate change sentiment impacts investment<\/em>. This posits three &#8220;sentiment&#8221; scenarios (paraphrased slightly for brevity &#8211; see the report for details of the models used):<\/p>\n<ul>\n<li>Two degrees.\u00a0This\u00a0is defined as being similar to RCP2.6 and SSP1 from the Intergovernmental Panel on Climate Change (IPCC) <a href=\"https:\/\/www.ipcc.ch\/report\/ar5\/syr\/\">AR5<\/a>. Resource intensity and dependence on fossil fuels are markedly reduced. There is rapid technological development, reduction of inequality both globally and within countries, and a high level of awareness regarding environmental degradation. It is believed that under this scenario global warming will not raise the average temperature by more than 2\u00b0C above pre-industrial temperatures.<\/li>\n<li>Baseline. This\u00a0is a world where past trends continue (i.e. the business-as-usual scenario), and there is no significant change in the willingness of governments to step up actions on climate change. However, the worst fears of climate change are also not expected to materialise and temperatures in 2100 are only expected to reach between 2\u00b0C and 2.5\u00b0C. This scenario is most similar to the IPCC\u2019s RCP6.0 and SSP2. The\u00a0economy slowly decreases its dependence on fossil fuel.<\/li>\n<li>No Mitigation.\u00a0In this scenario, the world is oriented towards economic growth without any special consideration for environmental challenges. This is most similar to the IPCC\u2019s RCP8.0 and SSP5. In the absence of climate policy, the preference for rapid conventional development leads to higher energy demand dominated by fossil fuels, resulting in high greenhouse gas emissions. Investments in alternative renewable energy technologies are low but economic development is relatively rapid.<\/li>\n<\/ul>\n<p>The modelled long-term performance for a range of typical investment portfolios is worrying:<\/p>\n<p><a href=\"https:\/\/weknow0.co.uk\/wp-content\/uploads\/2019\/04\/Portfolios-climate-change.png\"><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-1376\" src=\"https:\/\/weknow0.co.uk\/wp-content\/uploads\/2019\/04\/Portfolios-climate-change.png\" alt=\"\" width=\"624\" height=\"532\" srcset=\"https:\/\/weknow0.co.uk\/wp-content\/uploads\/2019\/04\/Portfolios-climate-change.png 624w, https:\/\/weknow0.co.uk\/wp-content\/uploads\/2019\/04\/Portfolios-climate-change-300x256.png 300w\" sizes=\"auto, (max-width: 624px) 100vw, 624px\" \/><\/a><\/p>\n<p>CISL suggest quite different investor behaviour depending upon which climate change path they think the world is taking: moving into High Fixed Income if No Mitigation seems to be the direction we are heading, but adopting an Aggressive (ie 60% equities, 5% commodities) asset allocation if the Two Degrees scenario looks most likely.<\/p>\n<p>Elsewhere the report suggests hedging via cross-industry diversification and investment in sectors with low climate risk. For example under No Mitigation, it is possible to cut the maximal loss potential by up to 47% by shifting from Real Estate (in developed markets) and Energy\/ Oil &amp; Gas (in emerging markets) towards Transport (in developed markets) and Health Care\/ Pharma (in emerging markets). However over 50% of losses in all scenarios remain unhedgeable (ie unavoidable through clever asset allocation alone).<\/p>\n<p>The second <a href=\"https:\/\/www.mercer.com\/content\/...\/mercer\/...\/mercer-climate-change-report-2015.pdf\">report<\/a> (<em>Investing in a time of climate change<\/em>) from Mercer in 2015, focuses on\u00a0the following investor questions:<br \/>\n\u2022 How big a risk\/return impact could climate change have on a portfolio, and when might that happen?<br \/>\n\u2022 What are the key downside risks and upside opportunities, and how do we manage these considerations to fit within the current investment process?<br \/>\n\u2022 What plan of action can ensure an investor is best positioned for resilience to climate change?<\/p>\n<p>The section I was drawn to here (it&#8217;s a long report) was Appendix 1 on climate models used, and particularly those estimating the physical damages and mitigation costs associated with climate change.\u00a0The three most prominent models used for this\u00a0are the FUND, DICE and PAGE models, apparently, and Mercer have opted for FUND. They have then produced some charts showing the difference between the damages exepcted for different levels of warming predicted by the FUND model compared to DICE:<\/p>\n<p><a href=\"https:\/\/weknow0.co.uk\/wp-content\/uploads\/2019\/04\/FUND-v-DICE.png\"><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-1379\" src=\"https:\/\/weknow0.co.uk\/wp-content\/uploads\/2019\/04\/FUND-v-DICE.png\" alt=\"\" width=\"640\" height=\"500\" srcset=\"https:\/\/weknow0.co.uk\/wp-content\/uploads\/2019\/04\/FUND-v-DICE.png 640w, https:\/\/weknow0.co.uk\/wp-content\/uploads\/2019\/04\/FUND-v-DICE-300x234.png 300w\" sizes=\"auto, (max-width: 640px) 100vw, 640px\" \/><\/a><\/p>\n<p>The result of this comparison, showing lower damage estimates by the FUND model, led the modellers to &#8220;scale up&#8221; certain aspects of the output of their model to achieve greater consistency.<\/p>\n<p>Both of these reports have been produced using complex models and a huge amount of data, carefully calibrated against the IPCC reports where appropriate and with full disclosure about the limitations of their work, and I am sure they will be of great help to pension scheme actuaries (although there does some to be <a href=\"https:\/\/www.theactuary.com\/opinion\/2019\/04\/letters-climate-control\/\">some debate<\/a> about this). However I do wonder whether as a profession we should be spending less time trying to find technical solutions in response to worse and worse options, and more time trying to head off the realisation of those sub-optimal scenarios in the first place. I also wonder whether the implicit underlying assumption about functioning financial markets and pension scheme funding is a meaningful problem to be grappled with at 3-4\u00b0 above pre-industrial averages as some of this analysis suggests.<\/p>\n<p>In the <a href=\"https:\/\/www.sustainablewoodstock.co.uk\/onetwo%20degrees%20summary.pdf\">summary<\/a> of Mark Lynas&#8217; excellent book <a href=\"https:\/\/www.amazon.co.uk\/Six-Degrees-Future-Hotter-Planet\/dp\/0007209053\"><em>Six Degrees: Our Future on A Hotter Planet<\/em>,<\/a> the three degree increase for which damages are being estimated is expected to lead to\u00a0<em>Africa [&#8230;] split between the north which will see a recovery of rainfall and the south which becomes drier [&#8230;] beyond human adaptation. Indian monsoon rains will fail.\u00a0The Himalayan glaciers providing the waters of the Indus, Ganges and Brahmaputra, the Mekong, Yangtze and Yellow rivers [will decrease] by up to 90%. The Amazonian rain forest basin will dry out completely. In Brazil, Venezuela, Columbia, East Peru and Bolivia life will become increasingly difficult due to wild fires which will cause intense air pollution and searing heat. The smoke will blot out the sun. Drought will be permanent in the sub-tropics and Central America. Australia will become the world\u2019s driest nation. In the US Gulf of Mexico high sea temperatures will drive 180+ mph winds. Houston will be vulnerable to flooding by 2045. Galveston will be inundated. Many plant species will become extinct as they will be unable to adapt to such a sudden change in climate.<\/em><\/p>\n<p><em>The [IPCC] in its 2007 report concluded that all major planetary granaries will require adaptive measures at 2.5\u00b0 temperature rise regardless of precipitation rates.[and] food prices [will] soar. Population transfers will be bigger than anything ever seen in the history of mankind. [The feedback effects from the] Amazon rain forests dry[ing] out and wild fires develop[ing] [will lead] to those fires [releasing] more CO2, global warming [intensifying] as a result, vegetation and soil begin[ning] to release CO2 rather than absorb[ing] it, all of which could push the 3\u00b0 scenario to a 4\u00b0-5.5\u00b0 [one].<\/em><\/p>\n<p><em>The last time the world experienced a three degree temperature rise was during the geological Pliocene Age (3 million years ago). The historical period of the earth\u2019s history was undoubtedly due to high CO2 levels (about 360 \u2013 440ppm \u2013 almost exactly current levels).<\/em> I would suggest that our biggest problem under these conditions is not that over 50% of losses on pension scheme investments remain unhedgeable.<\/p>\n<p>In his recent <a href=\"https:\/\/www.socialeurope.eu\/postcaptalism-unbearable-unrealism\">article<\/a> for Social Europe, <em>the unbearable unrealism of the present<\/em>, Paul Mason presents two graphs. The first is the\u00a0<a href=\"https:\/\/www.cbo.gov\/system\/files?file=2018-06\/53919-2018ltbo.pdf\">projection<\/a>\u00a0by the United States\u2019 Congressional Budget Office of the ratio of debt to gross domestic product until 2048 in the United States.<\/p>\n<p><a href=\"https:\/\/weknow0.co.uk\/wp-content\/uploads\/2019\/04\/debt-to-GDP.png\"><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-1381\" src=\"https:\/\/weknow0.co.uk\/wp-content\/uploads\/2019\/04\/debt-to-GDP.png\" alt=\"\" width=\"636\" height=\"434\" srcset=\"https:\/\/weknow0.co.uk\/wp-content\/uploads\/2019\/04\/debt-to-GDP.png 636w, https:\/\/weknow0.co.uk\/wp-content\/uploads\/2019\/04\/debt-to-GDP-300x205.png 300w\" sizes=\"auto, (max-width: 636px) 100vw, 636px\" \/><\/a><\/p>\n<p>The second is a\u00a0<a href=\"https:\/\/report.ipcc.ch\/sr15\/pdf\/sr15_spm_final.pdf\">chart<\/a>\u00a0from the IPCC showing how dramatically we need to cut CO2 emissions to avoid catastrophic and uncontrollable breakdown.<\/p>\n<p><a href=\"https:\/\/weknow0.co.uk\/wp-content\/uploads\/2019\/04\/CO2-emission-pathway.png\"><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-1382\" src=\"https:\/\/weknow0.co.uk\/wp-content\/uploads\/2019\/04\/CO2-emission-pathway.png\" alt=\"\" width=\"624\" height=\"336\" srcset=\"https:\/\/weknow0.co.uk\/wp-content\/uploads\/2019\/04\/CO2-emission-pathway.png 624w, https:\/\/weknow0.co.uk\/wp-content\/uploads\/2019\/04\/CO2-emission-pathway-300x162.png 300w\" sizes=\"auto, (max-width: 624px) 100vw, 624px\" \/><\/a><\/p>\n<p>Mason feels that capitalism\u00a0is too indebted to go on as normal and too structurally addicted to carbon. In his view <em>Those who are owed the debt, and those who own rights to burn the carbon, are going to go bankrupt or the world\u2019s climate will collapse<\/em>. This feeling is echoed by George Monbiot <a href=\"https:\/\/www.theguardian.com\/commentisfree\/2019\/apr\/25\/capitalism-economic-system-survival-earth\">here<\/a>, where he cites a <a href=\"https:\/\/www.tandfonline.com\/doi\/abs\/10.1080\/13563467.2019.1598964?tokenDomain=eprints&amp;tokenAccess=34DIKBKNXiFceff2QzRt&amp;forwardService=showFullText&amp;target=10.1080%2F13563467.2019.1598964&amp;doi=10.1080%2F13563467.2019.1598964&amp;doi=10.1080%2F13563467.2019.1598964&amp;doi=10.1080%2F13563467.2019.1598964&amp;journalCode=cnpe20&amp;\">paper<\/a>\u00a0by Hickel and Kallis casting doubt on the assumption that absolute decoupling of GDP growth from resource use and carbon emissions is feasible and summarises some alternative approaches to the capitalism he feels no longer has the solutions.<\/p>\n<p>Others dispute this, claiming that the Green New Deal is the only chance we have (<a href=\"https:\/\/braveneweurope.com\/simon-wren-lewis-how-to-pay-for-the-green-new-deal\">here<\/a>, <a href=\"https:\/\/www.vox.com\/energy-and-environment\/2018\/12\/21\/18144138\/green-new-deal-alexandria-ocasio-cortez\">here<\/a> and <a href=\"https:\/\/www.theguardian.com\/commentisfree\/2018\/dec\/13\/plan-europe-macron-piketty-green-new-deal-britain\">here<\/a>) to prevent irreversible climate change.<\/p>\n<p>Whether you agree with any of these predictions or none of them, agree that we face a climate emergency or feel that is too extreme a description, it all brings me back to Kahn and Dr Strangelove. We seem to have replaced the MAD of the cold war with the MAD of climate change, except that this time we do not even have two sides who can prevent it happening by threatening to unleash it on each other. It is just us.<\/p>\n<p>What we really cannot afford to be doing, via ever more complex modelling and longer and longer reports, is giving the impression that the finance industry can somehow &#8220;win&#8221; against climate change rather than joining the efforts to avert it as far as possible.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>In 1960, Herman Kahn, a military strategist at the RAND Corporation, an influential think tank which continues to this day, wrote a book called On Thermonuclear War. It focused on the strategy of nuclear war and its effect on the international balance of power. Kahn introduced the Doomsday Machine (which Kubrick used in his film [&hellip;]<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[2,15,8,24,11,12,13,14],"tags":[],"class_list":["post-1366","post","type-post","status-publish","format-standard","hentry","category-actuarial","category-climate-change","category-economics","category-health","category-pensions","category-prediction","category-regulation","category-risk"],"_links":{"self":[{"href":"https:\/\/weknow0.co.uk\/index.php?rest_route=\/wp\/v2\/posts\/1366","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/weknow0.co.uk\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/weknow0.co.uk\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/weknow0.co.uk\/index.php?rest_route=\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/weknow0.co.uk\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=1366"}],"version-history":[{"count":14,"href":"https:\/\/weknow0.co.uk\/index.php?rest_route=\/wp\/v2\/posts\/1366\/revisions"}],"predecessor-version":[{"id":1387,"href":"https:\/\/weknow0.co.uk\/index.php?rest_route=\/wp\/v2\/posts\/1366\/revisions\/1387"}],"wp:attachment":[{"href":"https:\/\/weknow0.co.uk\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=1366"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/weknow0.co.uk\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=1366"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/weknow0.co.uk\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=1366"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}