Implications of Limits to Growth for the Actuarial Profession
* Report: Resource constraints: sharing a finite world. Implications of Limits to Growth for the Actuarial Profession. Presented by the The Institute and Faculty of Actuaries. Written by Dr Aled Jones, Irma Allen, Nick Silver, Catherine Cameron, Candice Howarth & Ben Caldecott, 2013
"The evidence for resource constraints is strong but many actors in the global economy are not considering it in their decision making processes
This report, and an accompanying evidence report, demonstrate clear evidence for constraints across a range of resources over the short (years) and medium (decades) term. Some resource constraints will have local impacts (such as water) while others will have global impacts (such as oil). How resource constraints impact upon the economy is complex, uncertain and depends on a number of factors including how society responds. Political and market responses will have far reaching consequences which need to be better understood and better modelled by decision makers and their advisors. To some degree the impacts can be managed, or at the very least influenced – the outcomes very much depend on societal and government response to the problems caused.
Resource constraints might place a limit to future economic growth rates Resource constraints will, at best, increase energy and commodity prices over the next century and, at worse, trigger a long term decline in the global economy and civil unrest. As resource constraints raise the possibility of a limit to economic growth over the medium term, actuaries should urgently seek to understand the implications of this for their advice, assumptions and models.
Resources (and their interrelationship) represent a hidden set of determining factors to financial and demographic variables
These factors are ignored in standard economic modelling although they have had a significant impact on the economy in the past. In this report we review the historical evidence to explore the implications for the main actuarial assumptions including:
• Discount rates: Historical evidence suggests that lack of access to resources, especially energy, can lead to low economic growth which could cause low real interest rates and asset returns. Nominal interest rates are not predictably affected by low growth and in times of duress, governments might suppress interest rates and investment returns.
• Inflation: Periods of low growth tend to correspond to periods of low real wage growth. Commodity price shocks can cause inflation, but, depending on the circumstances and the reaction of policymakers, shocks cause inflation but also lead to low or negative real wage growth. Wages can be suppressed in times of national crisis. • Demography: Historical evidence suggests that while life expectancies have improved, periods of social and economic trauma can lead to declines in life expectancy. Beneficiaries of long term financial products such as pensions are a select group who may be insulated from the worsening mortality of the rest of the population.
The reaction of governments and other agents is crucial to the outcome for the global economy
If governments and economic agents anticipate resource constraints and act in a constructive manner, many of the worst affects can be avoided. Following shocks caused by resource constraints, the reaction of governments, for example in their decision over money supply and where to direct investment, will be the major determinant of the impact on the economy and the finance sector. Actuaries are well placed to advise governments and other economic agents because of their understanding of risk management and long term modelling.
This report modelled the impact of resource constraints on a pension fund
All of the scenarios modelled in this report showed lower returns on assets and higher costs for schemes compared to the “no constraints” model. Specifically the level of defined contribution pensions, compared to projected salary prior to retirement, for the worst scenarios is almost half of that of the “no constraints” scenario. A healthy defined benefit pension scheme could become insolvent within 35 years solely as a result of the limitations to growth as modelled, and in the absence of other detrimental influences (such as those experienced over the last 15 years in some western countries).
The impact of resource constraints on a long term savings vehicle such as a pension fund would be profound
If future economic growth is limited by resource constraints, or realistically by other factors such as debt overhang or reduced productivity, this puts into question the viability of current savings vehicles’ structure, regulation and even purpose.
Modelling resource constraints
In this report we explore 4 different scenarios associated with resource constraints."