Pensions for real – Even DC pensions!


All week we have been discussing how best to manage and measure Britain’s “pension deficits”. The FAB index which First Actuarial introduced last weekend has made quite an impression. My friend Rob Hammond will be on MoneyBox tomorrow lunchtime ; our press cutting box is crammed full of comments and articles about our radical proposition that UK pension funds could be as much as 133% funded.

The Pensions Regulator is now openly talking about a more balanced approach to scheme funding

The conversation has crossed continents, I got an email this morning from an American academic who had been listening to the arguments of Baroness Altmann and senior figures in the Bank of England about whether or not Quantitative Easing was the cause of our pension woes.

Here are her conclusions

My interest is primarily on the monetary links between debt (bond issuance) and pension schemes’ investments. At a very basic level after reading on the debate on the impact of QE on pensions, I’ve arrived at 3 rather obvious (?) conclusions:

1) indeed, not only have the lines that were meant to deliberately separate, in the late 1980s-early1990s, debt management from central banking become more blurred, but given QE’s arguably ambiguous (as per allowing different interpretations) impact on pensions, the BOE’s decision making process has become more politicized. In an aging society that under-saves (like most) and is contending with increased market volatility, perceived pension losses in the short term are subject to (over) reactions that cast monetary policy as necessarily distributive and likely detrimental.

2) at the root of the matter is this “ambiguity” (or, rather, lack so consensus) when it comes to actuarial estimates. DB pension schemes are running a deficit if calculations use traditional gilts plus or corporate bond yields to calculate discount rates. DB pension schemes are running an aggregate surplus if calculations use the new monthly First Actuarial Best estimate index, based on data underlying the PPF 7800 (as per a Professional Pensions piece – Oct 19). Even though I cannot appreciate the subtleties of this differentiation, it is clear (and ironic) that quantitative tools meant to produce some technical specificity have contributed to what are unquestionably very political disagreements. 

3) in a context marked by unconventional monetary policy,  pension funds and long-term bond issuances’ seminal co-dependence fuel increased skepticism about a regulatory framework that emphasizes de-risking for deficit-running DB schemes. This may (or may not) usher a call for more diversification as a way of life for schemes that tend to mimic each other’s investment strategies.

Whether any of this is either accurate or relevant I am not sure, Henry. My apologies if the lines above are still plagued with the amateurism of a new student of these very contextual dynamics. In any case, I shall remain a curious observer of the ways in which debt and pensions seem to endlessly challenge “conventional wisdom”  in unconventional ways.

Well I’d say that this is “accurate and relevant” to DB.

The lady was asking me whether it was accurate and relevant to DC. It is ironic that this has also been the week that we have jettisoned the (secondary annuity) baby with the bathwater .

My initial response to her question about the relevance of QE to DC was a little bland

DC is organised by consultants for large employers who do what they are told. There is very little variety between large employer schemes. 90% of investments are defaulted into a lifestyle fund which move from equities to bonds over time. These schemes make no effort to provide a pension, they rely on people exercising choices at a notional retirement age at which point they switch from saving to spending their pension pots.

Smaller companies do not have their own schemes, they participate in multi-employer master trusts or multi-employer contract based plans known as GPPs, the default investment options are similar to those for larger schemes though typically they are not so extravagant in investing in active funds nor as ambitious in asset allocation.

These smaller schemes aren’t advised upon, employers tend to sign up to mastertrusts or subscribe to GPPs without much thought or any due diligence. Very often they look for an IBM type safe harbour. The Government’s scheme (NEST) is often thought of as such a safe harbour.

The very largest of these multi-employer schemes – such as NEST and NOW are quite ambitious in their asset allocation strategies with clear investment philosophies, however most of the insurance schemes and smaller master trusts ape big company pension strategies.

Because there is so much defaulting and so little ambition, it is possible to say – without doing much research or gathering data, that UK DC is primarily invested in equity strategies for the accumulation of assets and bonds for the final years of accumulation (there is a phasing from one to another). Investment in alternative assets is very limited in DC – probably accounting for less than 5% of assets.


But encouraged by a positive response , I warmed to my theme

I agree with you about the spat over QE. Where QE has been destructive in the DC world has been in forcing down annuity rates so that people locked in to artificially low pensions with no restitution.

This situation was partially remedied when the Government removed the requirement for DC savers to annuitise the bulk of their pension pot, but “pension freedom” has been a shabby solution. There has been no alternative to the annuity except cash.

Most small savers have been cashing out and the bigger savers are attempting DIY drawdown with great peril of financial ruin. The construction of the investment portfolios for drawdown are often bizarre and usually far too expensive to achieve the stated objectives. 

We have been at the forefront of trying to create a lasting solution to the problems of how to spend your pension pot (we use the word decumulation). The same problems with bonds and equities persist. Some of my colleagues at First Actuarial have suggested that high allocations to equities – with a collective and long-term approach to investment – can achieve more than a high allocation to bonds.

This penchant for investment in real assets appears to be gaining ground in the new Government. A very important document called Beveridge 2.0 was written for Nigel Wilson by John Godfrey. Nigel is CEO of Legal and General, John was then his head of policy. John is now Head of Policy in the Cabinet Office – effectively Theresa May’s policy adviser. here it is

I listened to the new UK Pensions Minister’s recent address to the PLSA and was struck by it sounding like an articulation of what Wilson and Godfrey are saying. Essentially the message is that pensions have become too abstract as investments have been divorced from real things. People investing for themselves need to have some ownership. 

If I can see a way forward for people in the DC world that’s been thrust upon us, it’s in a re-connection with what they are investing in and in the production of a means for them to spend their savings that is not based on abstract and intangible products such as ‘annuity” and “drawdown”. People want pensions (the research tells us that- so do my friends – so do I) but they want confidence that pensions are “real”


For too long we have stood at the top of the ladder of abstraction exchanging derivatives with each other in the hope of magicking the problems of pensions away.

Pensions will only become adequate when people have confidence in them and save enough into pension plans so that those plans pay adequate income streams till the end of people’s lives. We need to make pensions real for people, investing in debt or cash deposits is not real, investing in companies and offices and shopping precincts and hospitals and housing is.

The debates around hedging out inflation and currency and interest rate risks are quite beyond the ordinary saver. They serve only to confuse and reduce confidence. We need to get back to the simple concepts of saving by deferring pay, investing in real assets and drawing pensions from collective pools using the social insurance that pension schemes can create.


About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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2 Responses to Pensions for real – Even DC pensions!

  1. Con Keating says:

    One of your better blogs Henry – It deserves re-reading a few times.

  2. henry tapper says:

    Thanks Con – I’m glad you gave me a chance to recognise your influence in the writing of it. This is of course about the “purpose of a fund” as you’ve been teaching me!

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