Thinking Needed for Long-term Investment Returns (Martin White and Alex Waite)
The background to this workstream is fairly fully set out in the slide presentation which can be downloaded here. There are many questions to ask, many of them fairly obvious, and it is perhaps surprising that discussion of this nature has not featured more prominently in the general economic discourse. Look particularly at slides 5,8,9 and 10.

In a nutshell, we strongly suspect that much of past investment returns have been the consequence of a story that will not be repeated to anything like the same extent as we hit resource, including energy constraints, as the world (we fervently hope) quickly moves into an ecologically sustainable mode, and we stop the process of climate change. So the combination of population growth, and growth output per person of the past will not continue.

And we do not believe the financial and inter-generational questions that this throws up have even been recognised, let alone reached public or political consciousness. As actuaries, we can quickly see how many of our financial practices and accepted wisdoms could result in economic catastrophe if we persist in an “it will all work out right” mode, which proves to be false. To an extent, it could be argued that this has already happened in relation to DP pensions.

There are many potential thinking avenues that we have identified already. For example:-

To start us off, how well do we understand in principle “where investment returns come from”? How sure are we of this analysis? What are the key assumptions on which this thinking rests – and how reasonable or how uncertain are they? Ideally these ideas need to be simple enough for actuaries to understand them using general reasoning.

Question identification: Can we now test these ideas on the experience of the past – say the past 15 decades? Can we distinguish the process of wealth creation from the process of putting (varying) prices on assets over time? What were the key developments in the wider world that were at play in each of those decades? Are there more subtle or more granular ways in which we can pose these questions? Have we got the main questions?

We could:
Engage in research to find out what thinking there is out there, in academia and elsewhere, that might help answer the questions in the bullet above.
Engage with relevant experts outside the actuarial profession in informal discussions to help with the above.
Draw tentative conclusions on the state of research and knowledge on the questions above – and indeed whether they are the right questions and whether further questions are relevant.

LIMITS TO GROWTH thinking. Tap into the large amount of work out there, including the actuarial literature research project carried out for the IFoA a few years ago. The relevance of limits to growth thinking is that we strongly suspect that it is a combination of growth in economically active population together with growth in productivity per head that governs the potential for long term investment returns. So our concern is that we may need the world to face up to a much lower investment return world than that which has existed in the past, with all the consequences which the actuarial profession is in a good position to understand and communicate.

Further line of thinking, which may overlap with other work streams, is to look at wealth creation in a wider sense, not just profits to pay dividends put also social dividends in the form of employee wellbeing and wellbeing of other stakeholders.

If this sounds interesting to you, let us know!