• William Bourne


Do we need to rethink actuarial monitoring? Can we invest in China consistently with our ESG principles? Summary of our latest webinar on 1st July 2021.

We held the last in our ‘elephants in the room’ webinar series on 1st July to debate two more pachyderms. As ever, Aoifinn Devitt hosted and the panellists were:

  • Shan Chen: Portfolio Manager, Arizona Public Safety Personnel Retirement System

  • Dr. Christine Chow: Appointed Adviser, FRC, Executive Director, IHS Markit

  • Colin Robertson: Independent Investment Adviser, SW1 Consulting

  • Rob Bilton: LGPS Actuary, Hymans Robertson.

Our first challenge was whether actuarial ‘prudence’ in the form of excessively low discount rates actually increases employer risk, either through unfeasibly high contributions, or by leading to an unnecessarily risky strategy. Our two actuaries were both clear that discount rates were set in a collaborative process and not just by the actuary. There is no ‘right’ discount rate because we do not know the future, and what is important is to understand the assumptions beneath it.

Using bond yields (gilts or corporates) which are artificially low because of financial repression suppresses bond volatility. As a result, correlations with other assets will be misleading, and that is important when looking for diversification. Another issue raised was the potential for distorting implied inflation calculations where nominal bond yields are repressed, but inflation linked ones are not. Our panellist then raised the question of secular change. If the past 12 years of Quantitative Easing and the effects of COVID lead to a very different future world, historic data may well have even less relevance, and therefore make actuarial modelling even less accurate.

We discussed whether there was too much emphasis on the discount rate and the funding level. There was agreement that the funding level was simply an aggregated snapshot which inevitably covered a wide range of employers, each with different funding positions. It is bound to be a volatile number given movements in asset prices, and should really only be given attention if either a very low or a very high number. One panellist preferred to focus on the probability of reaching full funding at the stated funding date; other suggestions were to use a dose of common sense, or to focus on cashflow-matching.

That led to a discussion on stochastic modelling, which has become the norm over the past ten or so years. Our panellist was clear that it was important for funds to examine the assumptions underneath the model, and also to review them against what is happening in the real world. Here the questions about the relevance of historical data at a time of secular change may come into play. He also highlighted the danger of overly focusing on the worst scenarios, which might indeed lead to too prudent an approach.

The general view was that there is no perfect solution to how to model liabilities. We touched on the use of inflation plus methodologies, and our actuaries generally supported an approach which reflected the actual investments in the scheme. We agreed it is better to be approximately right than precisely wrong, and it is important that users of the actuarial reports understand what is going on underneath the bonnet.

Whether in practice that has led to excessive prudence was left an open question. Public sector funds in the U.S. use a discount rate of 7.5%, significantly higher than in the U.K. Despite that, in general they have much lower funding levels. Their defence is that they can achieve that return through investment in private assets.

Our second ‘elephant’ was a look at possible conflict between investing in Chinese companies and investing sustainably. We started off with a look at the complexity of measuring sovereign states against ESG standards, and a panellist showed a slide with 41 different metrics. It rapidly became clear that there are some philosophical and cultural assumptions underlying our question – one audience member asked why we focused on China and not on the U.S.

That is not to deny that the State in China is more intrusive and undertakes activities which would be deemed unacceptable in the West. It is not just human rights, but also their influence over companies. One panellist commented that once a company is in their bad books, it is hard to recover. Against this, the Chinese model has a greater ability to effect positive change, and the greater level of surveillance provides greater safety to people.

The point was soon made that pulling out of China meant giving up on big opportunities, not just financially but also creating a positive impact by changing things. When we asked whether anyone in the audience was prepared to put the case for not investing in China, there was no volunteer. Another audience member made the point that almost all investments involve exposure to China.

The conversation therefore turned more onto the practical side of how to invest sustainably in China. There was a clear view that engagement was needed to accelerate change. The most need is probably on governance (the G), which can be confused in Chinese eyes with shareholder alignment. One panellist made the point that, while independent directors were introduced 20 years ago, there has been little change or improvement since. State-owned companies are a particular issue, as senior management are often still political employees with their eyes more on their political career than the well-being of the company.

There was some debate about the social side of the S. While hours are long in China, so are they in the U.S., with the additional risk of emails or phone calls in the middle of the night. One panellist mentioned significant age and gender discrimination, but an audience comment was that China’s demographics would soon change that. It was noted, for example, that after Hikvision was blacklisted for human rights abuses, the company became much more open to conversations with investors.

On the environment, the general view was that since 2008 the State has been focusing on areas such as biodiversity, and that while there was a long way to go, there was fair alignment between investors and the Chinese state and the direction of travel was clearly positive.

This was the last in our series of eleven lockdown webinars over the past sixteen months. We would like to thank, not just today’s panellists, but Aoifinn Devitt in particular for her moderating. We sincerely hope that any future ‘elephant’ can be debated in person rather than over the screen. Finally, we wish all readers a relaxing summer, whether at home or abroad.

Reading list

A History of British Actuarial Thought by Craig Turnbull published by Palgrave MacMillan (2017)