Actuaries should do more to take into account the potentially disastrous impact that constraints over natural resources and climate change could have on pensions, according to research commissioned by the Institute and Faculty of Actuaries.
In Resource constraints: sharing a finite world, a team from Anglia Ruskin University highlight 'clear evidence' for resources, including water and oil, becoming either more scarce or harder to access. Despite this, many actors in the global economy are not considering it in their decision-making processes, they explain.
'Resource constraints will, at best, increase energy and commodity prices over the next century and, at worse, create an uncertain and unstable economy,' the team from the university's Global Sustainability Institute said.
'As resource constraints raise the possibility of a limit to economic growth over the medium term, actuaries should seek to understand the implications of this for their advice, assumptions and models.'
Rather than a constraint on one resource, such as oil, the global economy and financial sector are facing a systemic risk where many resources are becoming more expensive and increasing environmental pressures are creating additional costs, the research explained. 'The implications for actuarial practice are urgent, complex and many,' it said.
In particular, the report warned that if future economic growth was limited by resource constraints, it could put into question the viability of current models for pension saving, how they are regulated and even their purpose.
If governments and financial markets choose to do nothing about the increasing limitations on resources and their impact on growth, it could spell 'financial disaster', the research explained.
Using actuarial modelling techniques, the worst case scenario for defined contribution pensions sees the level of retirement income almost halved when compared to projected pre-retirement income. Meanwhile, a 'healthy' defined benefit pension scheme could become insolvent within 35 years solely as a result of the limits on growth included in the modelling.
'The more extreme scenarios modelled represent financial disaster; the assets of pension schemes will effectively be wiped out and pensions will be reduced to negligible levels,' the report said.
'Currently actuarial models are effectively discounting to zero the probability of economic growth being limited by resource constraints,' it warned. 'If resource constraints are significant, this means that current models will persistently understate the value of liabilities.'
It noted, however, that if decision-makers act to anticipate these resource constraints, many of the worst effects could be avoided.
The Profession's Peter Tompkins said: 'Modelling work suggests that factoring resource constraints into risk management measures now could significantly limit future damage. Our research finds that many current savings structures, such as pension schemes, may have to be re-designed if we are entering a low-growth economic paradigm.
'Actuaries have a key role to play in advising decision makers on risk. With this research we aim to help actuaries to lead the way in modelling these risk factors and providing a voice for these risks within their sectors.'
