Last word: A lesson from the past about predicting the future
If the demise of Equitable Life taught us anything, it’s that predicting the future is one thing, but knowing how to respond to it is quite another, says The Review columnist Andrew Davis
There is a thriving industry in trend watching, designed to help companies position themselves ‘ahead of the curve’. Mostly, this is simply an exercise in extrapolation: predicting which nascent changes will turn into society-wide phenomena. Occasionally, someone will get their move beautifully timed and wind up in exactly the right place at the right moment, the early proponents of sports utility vehicles being a favourite example of the trendspotter’s art. But mostly it proves impossible to turn an awareness of broad trends into concrete actions at the crucial moment – even when the change that is unfolding is plain to everyone who cares to look.
There are few better illustrations of this than the collapse of Equitable Life, one of the most significant financial stories of the past 25 years. Equitable was the world’s oldest mutually owned life assurance company, founded in 1762, and was widely used by wealthy professionals to save for their retirement, thanks to its long-term practice of guaranteeing generous annuity rates to policyholders, funded by the investment performance of its life funds. In 1999, Equitable abruptly announced that it could no longer afford these guarantees and went to court to win the right to cut them. In July 2000, the House of Lords rejected its case and Equitable was effectively done for. Its slow demise unfolded over the following decade.
Equitable Life was undone by several factors, notably its long-standing policy of distributing profits to members rather than retaining a portion of them to guard against future shortfalls. But the biggest factor in its downfall was that it continued to behave in this way even when the forces that would ultimately overwhelm it were becoming visible. Ultimately, Equitable was unable to meet its liabilities because its policyholders’ life expectancy rose steadily over a period of several decades, in the process relentlessly increasing the amount of money that Equitable was contractually obliged to pay them.
If something works, we assume it will continue to do so According to life expectancy tables produced by the government using the cohort methodology, which studies a particular group of the population over a long period of time, men reaching the age of 65 in 1951 could on average expect to live another 12.1 years, while for women reaching 65 that year the figure was 15.5 years. Those averages edged up slowly until the late 1960s, when the pace of change accelerated, especially among women. In 1971, average life expectancy for a 65-year-old man was 12.9 years and for a woman it was 17.3. In 1981, the averages were 14.1 years and 18.1 years and a decade later – ten years before Equitable ran into the sand – they were 16.1 and 19.6 years for men and women respectively. The trend was becoming clear well before Equitable reached its crisis moment.
How did such a slow-moving adversary ambush it? There are several possible explanations. First, we anchor our assumptions about the future in our experience of the immediate past, which is another way of saying that we all naturally extrapolate. If something works, we assume it will continue to do so. Equally, individuals and organisations always respond more readily to short-term priorities and incentives, such as this year’s sales or budget targets, than to changes so gradual that they can remain almost imperceptible for years or even decades. Factors such as these make it especially hard to switch course in the face of slow-moving, long-term change such as demographic shifts. How can we know when the moment comes to do so when the trend never gives us the trigger?
The lesson of Equitable Life is that it is one thing to identify a long-term trend that will profoundly change the environment over a span of 25 years. It is quite another to identify the right moment to respond with a particular course of action.
With that in mind, several trends in play today, apart from increasing life expectancy, will clearly have a huge impact by the time the CISI reaches its half century. Automation of white-collar professional roles in areas such as accountancy, law and finance (compliance being one area ripe for increased automation in the years ahead) is one, and (putting the immigration debate aside for a moment) competition between countries to attract talented people to fuel the service economies of tomorrow is another.
This much is clear. But where will those big-picture trends have the greatest impact, and how and when should we respond? These are the real questions.
This article was originally published in the Q2 2017 print edition of The Review. The print edition is available to all members who opt in to receive it, except student members. All eligible members who would like to receive future editions in the post should log in to MyCISI, click on My Account/Communications and set their preference to 'Yes'.