I recently blogged on one of the most durable of myths surrounding resource depletion. It can be encapsulated in the rhetorical question: “Didn’t the Club of Rome predict back in the 1970s that we would already have run out of oil?”
Being a rhetorical question, the speaker is using the question for effect—safe in the knowledge that the audience knows the answer is “yes”. Except, of course, the answer is “no”, the Club of Rome never said that. I have posted the relevant pages from “The Limits to Growth: A Report for Club of Rome’s Project on the Predicament of Mankind” showing what was actually said back in 1972 here. Better still, read the original book which can be bought here.
Nonetheless, the Club of Rome is still a source of mild ridicule. So then imagine my surprise when I discovered the most unlikely supporter of the Club of Rome’s “Limits to Growth” report: the U.K. Institute and Faculty of Actuaries (IFA). Actuaries are professionals who specialise in the financial impacts of risk and uncertainty. The professional exams required to join the institute have a fearsome reputation with respect to their difficulty. Further, my image of an actuary is of a stolid quant who would dismiss the idea of resource depletion out of hand.
However, in a report entitled “Resource Constraints: Sharing a Finite World“, we see this statement:
The Limits to Growth report attracted significant controversy and rejection of its scenarios, however the data available to the present day agrees worryingly well with the projections, as figure 1 below illustrates.
And this chart (click for larger image):
The report’s principal thesis is that resource constraints will limit growth:
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.
They also note that low growth will lead to low real interest rates. This is a theme I looked at in my Long-Term Interest Rates and Growth post at the beginning of this month.
In order to understand the implications of resource depletion for the pension fund industry, the report goes on to map out 8 scenarios varying from the most pessimistic (B1), under which the market and government only take a short-term approach to the problem, to an optimistic scenario, under which a long-term strategy is adopted (P2). A ninth control scenario is also added based on the counterfactual case of where no resource constraints exist.
For those of you on a defined-contribution pension, the prognosis on the more pessimist “business as usual” type scenarios is poor. Replacement ratios (the amount paid out on retirement) are around 15-25% of salary.
For me, the collapse in annuity rates is a foretaste of things to come. Much commentary in the personal finance pages is to the effect that current low rates are an anomaly and will normalise once economic growth resumes (see, for example, here). In my opinion, adopting such a belief is foolhardy in the extreme. I view such low-return annuities as probably permanent, and am conducting my financial affairs accordingly.
If you think you are lucky enough to hold a defined-benefit pension (now almost extinct for new entrants these days), I wouldn’t be so sanguine either. According to the report, many of these will fall into bankruptcy once resource depletion hits growth (and for government-backed or insured schemes, I believe it inevitable that the rules will be changed to the detriment of the beneficiaries—there is no choice):
In sum, I believe that resource depletion will turn the financial world upside down in the years to come. It is some small solace for me that as prestigious an organisation as the Institute and Faculty of Actuaries is now having similar thoughts and highlighting the risk. In the words of Peter Tompkins from the IFA:
Despite strong evidence that there is a risk that resource constraints could have significant economic impacts, these risks are not being factored in by many actors in the global economy.
I couldn’t put it better.