One of the great words of the English language, fungibility means that something is replaceable.
What’s fungible and what’s not?
If I give you a tenner, that note is fungible with 10 £1 coins or two fivers.
If I am pregnant for 9 months, I produce a baby, but 9 ladies cannot be pregnant for one month and collectively produce a baby – pregnancy isn’t fungible.
As it impacts on the current debate about whether we deliver pensions singly or individually, the fungibility word is crucial.
If I put £1000 pounds into a collective DC scheme, there is £1000 pounds of pension benefits in the system which I can have back but which in the meantime can be used to pay others income in retirement. That money-converted into benefit is fungible
If I put £1000 into annuity, that annuity is mine and no-one else’s, it is not exchangeable and I can’t have my money back, no one else gets the benefit if I give it up- an annuity is non fungible.
This idea of fungibility is something that hard line individualists do not acknowledge. For them collectives are always at risk of losing their fungibilty and becoming Ponzi schemes where future benefits are guaranteed by the expectation of future income from future contributors.
If you deny the existence of fungibility you begin to doubt some central pillars of capitalism. The principle of equity that underlines the shares we purchase, is that someone in the future is prepared to exchange your paper for cash on the expectation that the paper will give a future income stream and a right on the capital of the company that gives it. You are taking a bet on the fungibility of the asset.
So instead you look for unique items that have a guaranteed value to you and fulfil your purpose- to the exclusion of anyone else’s. A single life annuity is a perfect example, beyond your lifetime it has no valuable, it is perfectly unfungible.
This is why you will always hear objections against collective schemes couched in terms of property rights.
It is perfectly natural for people to worry about these things. We do not easily trust the financial system to manage our rights collectively, we have a belief that what is ours is ours and that a bird in our hand is worth two in a collective bush.
But this isn’t necessarily helpful. If I go to Zipcar, I can expect to pick up a car on the street that will be the same model and do the same thing as another Zipcar, but it is not the same Zipcar as the last one because someone else has picked up the car I left behind ,driven it and left it in another place. I am trusting that my Zipcar will be fungible with every other Zipcar, I get the collective benefit of only having to walk a couple of blocks to pick my car up.
So I’m exchanging the trust I have in owning my car (which is absolute) for a trust in a system of collective ownership (which is dependent on everyone else doing the right thing).
There are millions of examples everyday of our trusting others to do the right thing- just analyse two minutes at the wheel of your car to realise how much we rely on other people -pedestrians , car-drivers and traffic regulators.
Because no man is an island, there is fungibility in our society but we all accept greater or lower degrees of fungibility. Someone like my friend Hilary Salt, celebrates completing her tax return as an act of collective endeavour, her contribution to society. At the other extreme, John Ralfe begrudges participating in any collective endeavour that does not guarantee him a prescribed entitlement. In between are most of the rest of us.
I didn’t trust Zipcar till a friend of mine told me how well it works, now I do. Collectives, when they work, work very well.
“Achieve by Unity” is the motto of my football club and I do believe that collectively we can do more than we can as individuals. That is because of the inherent advantages of fungibility which allows the free movement of money from one person to another without the interventions that clog up the financial system.
The most efficient pension systems, those that work on a pay as you go basis, are also the most fungible. The basic state pension is super-efficient because of its fungiblity- a function of it being collectively acceptable.
The least efficient systems are those that depend on being super bespoke. The insurance companies are currently reviewing their portfolios of legacy pensions set up in the last thirty years and trying to justify why they haven’t and won’t deliver. These have no fungibility and have failed because every moving part of the system that supports them needs to be individually oiled with policyholder cash.
CDC aspires to the efficiency of the basic state pension while acknowledging that without some individual property rights, trust will be stretched too far and fail.
It is – in the grand scheme of things- merely a rebalancing of the system which has tipped too far one way and has to be corrected.
I do not deny the rights of John Ralfe and those like him not to use CDC and enjoy its fungibilty, nor should he deny me my right to help build an alternative more fungible system for those who are not like him.
Individualists see collectivism as a threat, they must learn to enjoy fungibility!
This post was first published in www.pensionplaypen.com/top-thinking