Ian Neale explains that exponential growth is not sustainable in a finite world.
In my Scouting days we loved to sing the Gang Show anthem Crest of a Wave. The first two lines of the chorus are "We're riding along on the crest of a wave and the sun is in the sky", which is probably how George Osborne was feeling until his ship hit the tax credit cutberg this week.
As we know, someone riding the crest of a wave is enjoying success, but only for a little while: there is nearly always trouble ahead. In the pensions industry we spend a lot of our time navigating a maze. We have to remember all the pathways where we've been as well as figuring where to go next; all the time assuming there is actually a way out.
Rather like someone beginning to learn to drive, our attention is focused on the immediate road ahead. In our case it is worse because it's often hard to see the road at all. The way ahead is obscured by dust, mist, fog, or occasionally a heat haze with the propensity to create a mirage.
What we desperately need is an ability to see far ahead. We need politicians willing to take bold decisions on the basis of the best scientific research. Politicians with the ability, too, to develop and maintain consensus in society at the same time as a coherent strategy for the future.
Because it's not just about pensions tax legislation (my pet theme) or even about pension provision alone. We need to think more holistically. To realise that exponential growth is not sustainable in a finite world. To learn lessons from ecology, such as that a small perturbation to a complex system can have significant unforeseen consequences.
We need a broader vision. For example, in the defined benefit (DB) world a deal of frustration arises from the stubborn refusal of deficits to come down, despite hundreds of millions paid in extra contributions. It can't be entirely due to increased longevity. Ironically, the latest research indicates the actuaries have overestimated that. It has a lot to do with persistently low gilt yields and interest rates, as well as under-supply of long-dated index-linked gilts to match pension liabilities.
The fast-developing automatic enrolment programme, generally viewed as a 'good thing' to happen, could bring a new problem: are there going to be sufficient investable assets to buy? In the investment world generally at the moment there is a perceived shortage of good investments. Sure, companies can issue more shares, but would the associated risk of dilution really help?
On the other hand, of course there are many places crying out for investment. Trouble is, they are mostly publicly or state-owned assets like the NHS, which tend not to return a profit.
I'm not an economist, nor an actuary. I've never formally studied these things (and maybe it shows). I'm a scientist; originally I studied ecology. I look for connections, all the time. One of the most significant recently has been the growing realisation that continued extraction of fossil fuels is unsustainable if the human species is to avoid cooking itself. That impacts share prices, and ultimately pension fund asset allocation.
Ok, you might say, we know all this. The frog in a bucket of water that's being gently heated knows where it is, but it doesn't jump out as it would, if dropped into water, already be close to boiling. We need to realise what is going on around us, and act before it's too late for humanity.
The chorus of Crest of a Wave continues "All of our eyes on the distant horizon". Well, probably not all of us, but those at the helm and everyone with a role in plotting the course, certainly need to look well ahead.
Ian Neale, Director, Aries Insight, www.ariesinsight.co.uk
