Our mad approach to pension fund deficits – guest post by Anthony Hilton

This post appeared in the Business Section of the Evening Standard and has prompted two responses from Dawid Konotey-Ahulu and Con Keating that are also  published this morning. This is designed to be read first but you can read them in random order and still be both entertained and informed.

Our mad approach to pension-fund deficits

By ANTHONY HILTON on Wednesday 14 September 2016  (Evening Standard : Business Section)

It does not really matter if people want to believe silly things, as long as they don’t act on them.

It does not really matter, therefore, if the way pension-fund solvency is calculated is an affront to common sense, as long as people treat those valuations as opinion not fact.

We forget at our peril that the calculations of pension solvency are an artificial construct; it is not a factual calculation when a tweak to an assumption or two can make any deficit disappear.

But that is precisely what is now widely forgotten. Every month, half the pension-consulting industry queues up to toss out ever more inflated estimates of the combined deficit of defined benefit pension schemes as if these numbers were unassailable truths.

Meanwhile, all the other consultants, plus the investment banks and legions of advisers produce ever more fanciful and expensive ideas to help pension trustees deal with the consequences.

The result after a few years of this is that pension-fund investment has been completely distorted and defies logic, with some funds routinely making investments they know for certain will lose them money over the next 10, 20 and even 50 years.

They are doing this, not because it needs to be that way, but because the industry has become mesmerised by these calculations and convinced it has to act on them.

We are talking about a misallocation of capital on a truly heroic scale, running to tens if not hundreds of billions of pounds — sums so large they pose a threat to the wider economy.

The origin of the problem is that accountants and actuaries decided that, when making estimates about the future, pension funds should only count what they could be absolutely sure of achieving.

In the investment world, convention has it that only the totally secure return on government bonds can be considered as certain —though this is itself a heroic assumption in an age of sovereign defaults.

The yield on bonds is therefore used to calculate how much the assets of pension funds will grow over the next few decades. This determines how big the asset pot needs to be today if it is to grow to big enough to pay the pensions in years to come. If there are not enough assets in the pot today, that shortfall is the deficit figure.

It follows from this that every time interest rates fall, the assets will be assumed to grow at a slower rate. Therefore you need more of them now to avoid a shortfall in future. Each rate cut compounds the problem. Those doing valuations are forced to assume that the assets in pension funds will yield next to nothing for decades to come.

But in the real world, pension funds do not earn next to nothing — at least as long as they ignore the advice of consultants peddling liability-driven investment schemes. Left to their own devices most, even in these markets, make a return significantly higher than the bond yield.

There was proof of this earlier this week. Karen Thrumble has been measuring pension-fund performance for many years, first with WM — later State Street — in Edinburgh and now with Pirc.

Published this week under the Pirc banner, her Local Authority Pension Performance Analytics demonstrates that the average local authority pension fund grew 5.6% in the quarter to the end of June.

But the more fundamental point is that “over the medium and longer term, fund performance remains extremely strong with the average fund returning almost 9% over the last three years, 8% per annum over the last five years and 7% over 10 years” — the period that includes the 2008 financial crash.

If the reality is that the average pension fund in her universe has made 7% in a 10-year period — which no one could describe as easy — why do we take seriously a solvency calculation that assumes they will only make 2% or less? Why the hand-wringing over theoretical deficits when, in the real world, funds are making returns that are more than they will need to meet all their obligations in full?

The negative consequences are very real. In the past week, plastics company Carclo cut its dividend because it says it needs more money to top up its employees’ pension fund.

It was a high-profile case but across the nation for years now, money that companies should have used to invest for the future, to grow their business and to improve productivity has instead been poured into pension funds to cover deficits that only really exist in the mind.

When in a hole, you should stop digging but we are going ever deeper.

Consultancy Hymans Robertson yesterday issued a press release that said pension costs could be cut by £350 billion, or an average of £32,500 per pensioner, by using a lower inflation measure as the yardstick for future pension increases. This, it added, “could take a third off the £1 trillion pension deficit”. So now it is pensioners’ payments that are in jeopardy because of deficit phobia.

How in a sane world did we get here? Well, it was said about one of the more intractable disputes of the 19th century that only three people understood the Schleswig-Holstein question — one was dead, one was mad and one had forgotten the answer.

You might apply the same to pension-fund valuation. Yet such is the power of inertia, so entrenched is the status quo and so lucrative is it for the armies of consultants and advisers that even sane people think that hey have  no choice but to follow the rules of a mad system.

The actuaries and accountants who started all this have a lot to answer for. It is time for them to go back to the drawing board.


As always, the comments are almost as helpful as the idea itself.

COMMENTS  (4 Comments)


You could value pensions with the payment certainty that the government will be around in 30 years. Alternatively, as you suggest, you could value them with the certainty that Apple and Facebook will be around in 30 years. The article attempts to take issue with economic logic. If you wish to take issue with current set up perhaps focus on current interest rates, bond yields and quantitative easing rather than countering economic logic. Hope this helps.


It’s a shame to see a respected journalist denying the existence of a problem rather than spending time and effort on the tough choices that need to be taken in order to solve it. Here’s why Anthony Hilton is wrong on this –



Being an accountant makes no difference. Antony raised this before and no one listened and unfortunately even though he is a trillion percent right no one will listen again.

Such is the power of group stupidity in the city where they all follow like sheep

Better to put pensions in the hands of the unqualified and see real returns.

With so many trackers running pension allocated money it’s hard to justify how they charge so much in fees for managing sheep

The dreadful thing is the FCA have just chosen to pull an investigation in fees. A typical move by an incompetent and useless regulatory body who see no issue too irrelevant to investigate but somehow always leave those of real importance untouched; to then see a mess develop and once again shown to be at fault declare lessons have been learned

The FCA is a truly useless joke and its new CEO the biggest joker of them all and not fit to hold the position 


Your conclusion is right, but you’re completely wrong as to how pension scheme assets and liabilities are measured. Assets are measured at market value, future liabilities are discounted at the rate of a good quality corporate bond.  So as interest rates fall, the liabilities are hardly discounted at all, whereas) one hopes) the assets will continue to grow in value. As long as pension schemes invest in assets that are riskier than good quality corporate bonds, asset value growth should be greater than the discount factor applied to liabilities.  Hence scheme deficits.  I’m an accountant. Stupid accounting standard(s).


A counter-argument from Dan Mikulskis’s blog Abnormal Vol dated 16 September 2016

Why Anthony Hilton is Wrong on Pensions

“Expected returns don’t pay benefits, cash does”

Anthony Hilton recently wrote a stinging attack on pension consultants -like myself- who advise defined benefit pension schemes to measure, and hedge, their liabilities with reference to gilt yields.

Here’s one (of several) reasons why he’s wrong.

His argument – that you could fund based on the much higher expected returns on risky investments – might perhaps be justifiable in a world where all corporate sponsors were rock solid and would last forever (clearly we do not live in this world – and even then it would expose companies to some needless nasty surprises along the way, but anyway).

However this completely misses the point that a major reason we fund pensions at all is precisely to provide security in a situation where the corporate sponsor ceases to be able to make payments itself. The reason we need to measure deficits is to get a picture of how secure the benefits might be in the absence of the employer, and to take corrective action (eg topping up contributions) if the situation is off-track, before it is too late.

And in those situations of sponsor company failure, we would hit a major snag under Mr Hilton’s approach: it’s hard cash that must be used to secure the benefits – Mr Hilton’s expected returns won’t cut it I’m afraid. Just ask the pensioners of BHS scheme, or indeed the allied steel and wire groups, still campaigning for their pensions over a decade later. This second example pre-dates the Pension Protection fund, so thankfully pensions today are better protected, but the conclusion for scheme funding – that you can’t rely on high future expected returns to discount liabilities – remains valid.

Pensions need to be paid to members in real cash, and it flies in the face of both accepted theory, and common sense, that the amount of money needed to provide these benefits can be reduced depending on the assets held to deliver them.

Today’s unfortunate reality is that the defined benefit system in the UK is on average chronically under funded compared to the benefits it has promised. Time and effort would be far better spent on considering the tough choices that might need to be taken, rather than on attempts to deny the existence of a problem in the first place.

Unfortunately Mr Hilton’s ill-judged remarks from an otherwise respected journalist damage the hard work that many of us in the industry have been doing for many years to try and secure the benefits and financial futures of those members dependent on defined benefit pensions for their retirement.


About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
This entry was posted in pensions. Bookmark the permalink.

2 Responses to Our mad approach to pension fund deficits – guest post by Anthony Hilton

  1. DaveC says:

    It’s no wonder people are trying different strategies to find yield and safety for their wealth… but in doing so and there being no firm consensus somewhat proves that there is no safety or yield left.

    There is a panic as people realise there is no exit. Their wealth is on a downward elevator with no way off. The elephant in the elevator is becoming very real.

    Either the price of things sinks. Or the value of the money sinks.

    But that is like saying did the sea rise and consume the Titanic, or did the Titanic sink into the sea.

    To those wasting time commenting on deck chair arrangement strategies it’s irrelevant.

    The end result is the same.

    Imo, only wild, risky and personally fitting strategies will probably pay off. Do what everyone else isn’t doing, and you stand a chance of not being in the collective stampede for tulips.

  2. Shane Norman says:

    As with so many uses of historic data to quantify future liabilities (credit ratings, anyone?), this seems to be the old problem of trying to drive a car while looking only at the rear-view mirror. Would it not help if, instead of using a single data point for the funding calculation, actuaries used a rolling five -or 10-year historic average for gilt yields? The longer the period the better, given the length of the pensions liability tail. How about a 20-year average, then?

Leave a Reply