Delivering a pension

It is a part of adulthood to assume responsibility, for putting a house over your head, for building a family, for providing for yourself in your old age. These are the things that adulthood is about.

Some people take on more responsibility than others, they choose to be school governors, become football coaches, serve in their church.

Some people choose to be godparents or  executors of others wills. Some people choose to be the trustees of pension schemes.

These voluntary responsibilities whether civic or private are to a degree altruistic though they provide purpose and self-worth which compensates for the absence of physical reward (pay).

The trustees of pension schemes, especially those that offer a promise of a percentage of final pay have been under immense scrutiny of late since many of the schemes they officiate have not delivered to expectations-indeed many of the schemes have failed or are failing.

Trustees of schemes that fail suffer a triple whammy;

  1. they are likely to be  member of the failing scheme and so they lose their personal security in retirement
  2. they feel responsible for their colleagues and former colleagues who are also suffering financial loss
  3. they have let their scheme fall into the Pension Protection Fund, a safety net for failing pension schemes, but in doing so they have put a strain on a much wider group of members, those of other schemes and ultimately the ordinary taxpayer… the insurer of last resort.

This triple whammy is the worst possible result for a trustee, you can imagine analogous situations for the other types of “fiduciaries” I’ve mentioned above.

The analogy I find closest is that of delivering a child into the world. In taking on the responsibility of parenthood we need to manage the risks both before and after the birth and sometimes it goes wrong, For all the advice and help of medics, things can go horribly wrong. Ante-natal classes prepare us for such eventualities. We learn to evaluate probabilities through Amniocentesis and similar procedures, these help us to assess the risks of childbirth but ultimately we know that the decisions we take are our decisions. We take calculated risks.

Until recently trustees tended to manage their pension schemes with little regard to the risks of things going wrong. As is well known, the happy coincidence of favourable economic conditions made for healthily funded pension schemes. Unfortunately, when the music stopped  many schemes found they had no chair to sit on.

Trustees now have to evaluate the risks of their pension scheme not delivering its promises and have developed a new culture and a new language to understand the problems they are facing. The term used to describe this new way of looking at pensions is “Liability Driven Investment”. It starts by looking at the promises and developes strategies that minimise the risk of things going wrong.

This is in contrast to the previous method employed by trustees which looked at accumulating as much wealth in the pension scheme as possible and distributing promises based on that accumulation continuing ad infinitum.

The ordinary member of a pension scheme will not be aware of Liability Driven Investment, however he or she is acutely aware that their pension may be at risk.

Members have two choices. Either they can put their trust in trustees to see them through, or they can take their money out of the schemes and manage it themselves ( in a personal pension). The majority of people keep their money in the pension scheme despite of their anxiety.

One of the things that I marvel at with childbirth, is the way in which doctors and midwives keep parents in the picture, sharing scans and keeping parents appraised right through the childbirth process. We are hugely fortunate in the medical assistance we get (just think of other countries).

I marvel at trustees of pension schemes for shouldering the burden of responsibility that the do. But like the expectant parent i would like to be better informed of the progress of the pensions delivery.

The system of analysis that underlies Liability Driven Investment is extremely complex but the outputs of that analysis are fairly simple. They tell trustees the likelihood of the scheme going bust, the factors they have to watch out for and-importantly- the things trustees can do to lessen the risks. Of course many of the risks are outside the trustee’s control an employer going bust, a stock market crash, even a quick shift in interest or inflation rates – and trustees can do nothing about us living too long.

If we are to get people to understand their retirement provision better, we need to start with the risks. The basic risk of people not having enough to meet their retirement expectations and the sub-set of risks that they take on the way.

People have gone off glossy brochures of sun-tanned pensioners lying on sandy beaches and want hard facts. They don’t want projections of what happens when things go right, they want factual information to ensure that things don’t go wrong.

I am a pension practitioner who struggles to find the right language to help people to understand the risks they take. That’s why I write pieces like this it helps me get my head round the problem. If you’ve got this far and my “word count is approaching 900” so I must shut up, perhaps you’d like to leave a comment. Learning to get the message across is important.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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