How much volatility can we take? Pension Play Pen Lunch Sept 5th 2011

James Smith- First Actuarial

Ben Mulroney– mallowstreet

Jenny Kreser – Silverman Sherliker

Mark Benfold  Railway Pension Scheme

Malcolm Delahaye – Supertrust

Jennny Yeo  – Affiliate Managers

Paull Chapple -Close Brothers

Jeroen Wilbrink – Partner at SECOR Asset Management

Thornton Wells  – Mattioli Woods

Michael Clarke -Capita Pension Trustees

Steve Barker- Barker Tatham

Jenny Maskell- Hays Recruitment

Stephen Cohen

Andy Seed – Deloittes

Henry Tapper – First Actuarial

Suzie Burrell -Shoosmiths Solicitors

Simone Utermark- S & P

Chetan Ghosh – Centrica

A fine turn out for our first autumn meeting and the 22nd consecutive lunch. There appeared to be two camps, those who consider funded pensions a good thing and , subject to sufficient ability, manageable – and those who consider that the volatility of funded schemes such that they cannot be considered a good idea.

The majority of the people in the room working for funded pension schemes. So it’s no surprise that at a final vote, 14 considered we should hug volatility as Prince Charles would hug a tree while 4 considered the German system of insurance and book reserving and the UK system of BSP/S2P the only pension schemes that didn’t give the man on the Clapham omnibus/trustee board the heeji beejies. 

Stephen Cohen kicked matters off with an econium to volatility imploring us  to love volatility and embrace it.

Jenny Kreser pointed out that the Regulator was not too keen on that and James Smith weighed in by blaming the actuaries who had allowed mark to market accounting creating discomfort not only in Brighton but on the sponsor’s balance sheet.  Jeroen Wilbrink freshly donned a fiduciary manager concurred.

Andy Seed joined the argument by outlining his proposals for changes in the UK DC – system. These included a major overhaul of SMPI to enable people to understand the risks they were taking. He  pointed out that giving people more control of their investments would enable them to manage more risk.

Malcolm Delahaye argued for Fiduciary Management within DC with less and not more choice for members but a higher degree of risk management within the default fund. He argued that porting the LDI techniques prevalent in DB into DC was vital to make the DC default a safe haven.

Chetan Ghosh stated that the answer to the question  depended on the funding position of each pension scheme– or in DC to people’s personal circumstance. His scheme had a strong employer covenant and could not be regarded as typical. Last month the huge intra day swings in the markets had given his scheme opportunities. Volatility had become their friend. He accepted that a major challenge for his trustees was to find the right balance between short term mark to market values and longer term considerations surrounding meeting scheme cashflows.

Thornton Wells agreed that the level of risk that could be taken by an entrepreneur who has recently sold his business for £20m and an average DC investor in a workplace scheme was enormous , effectively putting meat on the bones of Chetan’s argument.

 Steve Barker made a strong and coherent argument for risk management techniques for final salary schemes based on LDI principles. Andy Seed summed up Steve’s view by stating that ” the answer is about the funding position”.

Mark Benfold of the Railways Pension Scheme mentioned that he had 200 employers in his  scheme – each employer had different risk  tolerances but he stated his job was to give a composite solution that could be acceptable to all.

Michael  Clarke of Capita Trustees pointed to  a lack of synergy between the trustee and the sponsor. He bemoaned their being little joined up thinking from employers who had insufficient interest in pensions after the departure of many senior executives from the legacy DB scheme. Without the interest of the sponsor, the trustees were capable of taking either too much risk or too little.

In summary, the debate in 40 minutes threw up three themes to which it returned again and again

  • The level of volatility acceptable to members and schemes depends on their financial circumstances. Perversely, those who need to make the most of their money have the least capacity to take risk
  • Advice can increase the capacity of people ,corporates and trustees to accept rewarded risk
  • There was a body of opinion in the room who did not consider that funded pensions were capable of providing manageable risk for many and that an unfunded system might have been the answer

About henry tapper

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