Actuaries are entrusted with a huge responsibility in today’s world. We need them to tell the future, which is impossible. This is particularly true in the world of pensions where the collective input now has to be equal or greater than the collective output later. If those numbers don’t match up there’s bound to be trouble in the coming years. However, the weather, specifically global warming, could make this even more difficult.
A new report, from the Institute and Faculty of Actuaries, a United Kingdom body governing the profession, asserts that resource limits caused by global warming mean that actuarial calculations are already off, and they’re only going to diverge more fully.
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The full report, which was authored by Dr. Aled Jones, Irma Allen, Nick Silver, Catherine Cameron, Candice Howarth and Ben Caldecott, is too long to fully explore in this article, but is available at this link for any interested.
Let’s assume, as many in government have not, that global warming is real, and that it will place constraints on water, energy, and food. With these three affected, it is clear that almost all goods in the economy will be subject to resource limitations. That could have disastrous effects for pension funds.
According to the authors, while many world leaders are beginning to look at the climate and geopolitical effects of global warming, very few have looked at the financial mechanisms that will come into play in a world with extremely constrained resources.
The first effect, which has been vaguely mentioned by politicians, is a discounted economic growth rate due to a lack of access to energy resources or other important primary goods. This slow growth will probably lead to lower interest rates on debt, and lower returns on equity.
Low growth also tends to bring with it inflation, and in a world where the limits of natural resources are becoming apparent for the first time in two centuries, that can only add to inflationary problems. Demographics are likely to change, a lower life expectancy commonly partnering with times of turmoil.
What does this all mean for pension funds? In a world where many of the largest funds in the United States are already struggling to grow at a rate that will see them be able to pay out over the coming decades, lower investment returns mean disaster.
Global warming is not well understood, and the impacts that it might have on humanity in the coming century are certainly not known. What is clear, however, is that if it takes off in any way that climatologists and other scientists predict, economic growth, and investment returns, will be lower going forward.
Pension funds are built on a simple model, where lots of workers put money in a pool, and somebody manages that pool in order to keep it ahead of inflation, and pay out when they retire. If money is harder to manage, returns are likely to be less and pension funds are not going to be able to keep up.
Problems with pension funds are unlikely to be the biggest challenge facing the society if global warming’s worst effects come to fruition; however, they are important to a lot of people who are reaching the ends of their working lives today. Those people will be some of the most negatively effected in the early days of a warming crisis.