Pensions & Resilient Investment

David Korowicz

Risk/ Resilience &

Feasta, The Foundation for the Economics of Sustainability

11th May 2011

Pensions

►We are naturally concerned about our future welfare-food, shelter, health, security, infrastructure- and increasing expectations of discretionary consumption.

►State pensions first introduced in 1889 (Bismark)-a feature of a new kind of economy.

►Pensions are the means by which people directly, or via employers and governments, defer current consumption to invest, via financial markets, in expected future consumption of goods and services.

►In a Pay-As-You-Go system, assumption society can support welfare into the future.

►Currently widespread concerns:

Demographic changes

Underfunding- 75% DB plans in Ireland

DB DC0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

64%

48%

25%

28%

4%

6%

4%16%

Alternatives

Cash

Property

Fixed Income

Equities

Investment in financial assets is growth & systems dependent

►Equities valuation (P/E) growthdependent.

►Servicing debt (interest+principal)Is a call on future growth

►The operational fabric of complex society is maintained or enhanced

►The operational fabric includes:

Critical infrastructure, supply chains,monetary stability, global discretionaryincome... (€72 billion IAPF data 2009)

Welfare & Macro-System Stability

Globalised Economy

►Self-organised

►Growth adaptive

►De-localising & Integrating

►Increasing Complexity

►Increasing Co-dependence

►Increasing production flow rate

Understood through Non-equilibrium thermodynamics

National economies exist via integration with globalised economy

Three largest Occupational Groups

UK Census 1911 UK Census 2008

Domestic Service Sales Personnel

Agriculture Middle Managers

Coal Mining Teachers

Food

Ratio of food expenditure to income

Urban Britain 1904* UK Household Survey 2008

63% 10.4%

Primary food production-a few % of population

*British Board of Trade (1904)

in Poverty in Britain in 1904: An early social survey re-discovered Gazeley & Newel PRUS Working paper 38/ 07

Occupation, Energy, Food

TransportationTransportation

Oil & Natural Gas

EELLEECCTTRRIICCIITTYY

Potable & Waste WaterPotable & Waste Water

Emergency ResponseEmergency Response

Government IITT &&

TTEELLEECCOOMM

Banking & FinanceBanking & Finance

Infrastructure Interdependencies

Switches, control systems

Storage, pumps, control systems, compressors

e-commerce, IT

Pumps, lifts, control systems

Signalization, switches,control systems

e-government,IT

Medical equipment

Water for cooling, emissions control

Water for production, cooling, emissions control

Fire suppression

Cooling

Fuel transport, shipping

Fuel transport, shipping

Chemicalstransport

Transport of emergency personnel, injured, evacuation

Co

mm

un

ica

tion

s

SCADA

SCADA

Trading, transfers

SCADA

Co

mm

un

ica

tion

s

Location, EM contact

Generator fuels, lubricants

Heat

Fuels, lubricants

Fuels, Heat

Currency (US Treasury; Currency (US Treasury; Federal Reserve )Federal Reserve )

DOE;DOE;DOTDOT

Regulations & enforcement Regulations & enforcement FERC; DOEFERC; DOE

Personnel/Equipment Personnel/Equipment (Military)(Military)

Fin

an

cin

g, re

gu

latio

ns

, & e

nfo

rce

me

nt

Fin

an

cin

g, re

gu

latio

ns

, & e

nfo

rce

me

nt

SEC; IRSSEC; IRS

FEMA; DOTFEMA; DOT

DOTDOT

EPAEPA

Detection, 1st responders, repair

Fin

an

cin

g &

po

licie

sF

ina

nc

ing

& p

olic

ies

Financing & policiesFinancing & policies

Miriam Heller, NSF (2003)

Critical Infrastructure

Economies of Scale

Institutions of Trust

Monetary Stability& Intermediation

Production flows

Energy & Resource flows

Behaviour adaptation

Conditions maintaining stability at risk

Highly Unstable Credit System & Imbalance

Peak Oil Peak Food

Even this assumes

stable prices, investment,

general system stability

Energy declines implies reverse economic growth-unless substitute/ efficiency

Reduced energy flows forces a positive feedback on energy flows

Implications-financial assets

(McKinsey &WEF 2010)

►Debt cannot be serviced in real terms

►Global banking system insolvent (real)

►Debt deflationary spiral+higher prices+interest rate hikes ►deflationary cyclone

►Rapid decline in discretionary consumption

►Global banking contagion (derivative links) Leading to supply-chain contagion

►Rising monetary opaqueness

►Tiny exit window

►Pensions in financial assets doomed

Time

Be

lie

f in

no

gro

wth

/co

lla

ps

e EmpiricalEnergy & food pricesWarningsStock & bond markets

ActionsAsset dumpingNew AssetsEmergency measures

Psychological Confidenceto Fear

EmpiricalEnergy & food pricesWarningsStock & bond markets

ActionsAsset dumpingNew AssetsEmergency measures

Psychological Confidenceto Fear

Adaptation opportunity

Government & central banks unlikely to be prepared

Critical Infrastructure

Economies of Scale

Institutions of Trust

Monetary Stability& Intermediation

Production flows

Energy & Resource flows

Behaviour adaptation

We are 100% invested in one view of the future

It is untenable

By habituation, our dependencies, thus vulnerabilitiesobscured

What would we do, in the final days of macro-systemstability to protect our future welfare?

Resilient Investment

Resilient investment Resilient investment is the conversion of current financial and other assets adaptiveto large-scale market and general welfare stability into assets that serve to protectthe foundations of personal and societal welfare into the future should that stability collapse.

►Core Assets

►Localisation

►Social Capital

►Human Capital

►Co-dependency & interdependence

►Natural Capital

►De-financialise

►Low complexity

Definition

Investment Considerations

►Timing

►Discount Rate & investment returns

►Resilient investment in not green investment

►Avoidance of stranded assets

►Limited vehicles for fast conversion