Pensions & Resilient Investment David Korowicz Risk/ Resilience

1. Pensions & Resilient Investment David Korowicz Risk/ Resilience & Feasta, The Foundation for the Economics of Sustainability 11th May 2011

2. 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

3. Investment in financial assets is growth & systems dependent ►Equities valuation (P/E) growth dependent. ►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 discretionary income... (€72 billion IAPF data 2009)

4. 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

5. Occupation, Energy, Food 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

6. Infrastructure Interdependencies Financing & policies SEC; IRS E L E C T R I C I T Y I T & T E L E C O M Banking & Finance Trading, transfers e-commerce, IT Currency (US Treasury; Federal Reserve )‏ Regulations & enforcement FERC; DOE Government e-government, IT Communications Financing & policies Personnel/Equipment (Military)‏ Detection, 1st responders, repair Medical equipment Emergency Response FEMA; DOT Location, EM contact Fuel transport, shipping Fire suppression Transport of emergency personnel, injured, evacuation Signalization, switches, control systems Transportation DOT SCADA Fuel transport, shipping Fuels, lubricants Fuels, Heat Generator fuels, lubricants Financing, regulations, & enforcement Storage, pumps, control systems, compressors Oil & Natural Gas DOE;DOT Communications SCADA Chemicals transport Water for production, cooling, emissions control Water for cooling, emissions control Potable & Waste Water EPA Heat SCADA Pumps, lifts, control systems Cooling Switches, control systems Miriam Heller, NSF (2003)‏

7. CriticalInfrastructure Institutionsof Trust Behaviour adaptation Production flows MonetaryStability & Intermediation Energy & Resource flows Economiesof Scale

8. Conditions maintaining stability at risk Peak Food Peak Oil Highly Unstable Credit System & Imbalance

9. Reduced energy flows forces a positive feedback on energy flows Even this assumes stable prices, investment, general system stability Energy declines implies reverse economic growth-unless substitute/ efficiency

10. Implications-financial assets ►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 (McKinsey &WEF 2010)

11. Psychological Confidence to Fear Psychological Confidence to Fear Empirical Energy & food prices Warnings Stock & bond markets Empirical Energy & food prices Warnings Stock & bond markets Actions Asset dumping New Assets Emergency measures Actions Asset dumping New Assets Emergency measures Government & central banks unlikely to be prepared Adaptation opportunity

12. CriticalInfrastructure Institutionsof Trust Behaviour adaptation Production flows MonetaryStability & Intermediation Energy & Resource flows Economiesof Scale

13. We are 100% invested in one view of the future It is untenable By habituation, our dependencies, thus vulnerabilities obscured What would we do, in the final days of macro-system stability to protect our future welfare?

14. Resilient Investment Definition Resilient investment is the conversion of current financial and other assets adaptive to large-scale market and general welfare stability into assets that serve to protect the foundations of personal and societal welfare into the future should that stability collapse. Resilient investment ►Core Assets ►Localisation ►Social Capital ►Human Capital ►Co-dependency & interdependence ►Natural Capital ►De-financialise ►Low complexity

15. Investment Considerations ►Timing ►Discount Rate & investment returns ►Resilient investment in not green investment ►Avoidance of stranded assets ►Limited vehicles for fast conversion