“Breaking ranks” with a pernicious orthodoxy.


FAB (i)


In a significant interview with the FT, Michael Higgins, former chair of the Pension Regulator and chair of a £12bn pension trust argues that valuing pension liabilities using the gilt yield is leading to a ….

“significant misallocation of resources — for example, from company profits to pension schemes rather than to investment or increased dividends.”….

“We need to find a better way of examining pension fund liabilities, as this is not just an arcane accounting or actuarial issue,”

In the interview O’Higgins is quite explicit over what needs to change, Jo Cumbo reports him asserting

 a more “sensible approach” would be for schemes to assess liabilities based on the expected yield on the actual assets they held, such as equities or property

O’Higgins goes on to directly link this misallocation of capital to the problems Britain , either in or out of Europe, is having with productivity.

Rather than criticising QE for the negative effect it is having on pension funding, O’Higgins promotes the need to reflate the economy through the more productive use of capital.

In doing so, he points out that it is not regulation that is forcing pension schemes to demand more money from employers, but the rigidity of the accounting and actuarial professions.

The article stops short of calling us “self-serving”, but no-one who understands the current craze for LDI will miss the implication of O’Higgins words. Liability Driven Investment has its foundations in a gilts based valuation system and LDI is a monster of the asset managers and consultant’s invention.

Breaking ranks

Last night I published a blog from Professor Otsuka at the London School of Economics calling for his pension scheme (Britain’s largest) to rethink it’s position on liability valuation.

I am happy to say it was a paper from First Actuarial that prompted his writing and we make no bones about it, the divergence of the gilts based funding position (purple) from the best estimates funding position (blue)  clearly demonstrates Michael O’Higgins point.


Our friend Raj Mody is quoted in the FT talking of a their being a reluctance among advisers to “break ranks”, well one adviser has been breaking ranks for some time and First Actuarial will continue to champion what John O’Higgins and Mike Otsuka are calling for.

As with Brexit so with pensions, it is the lens with which we look at the problem that determines the solution. If we continue to fear the worst, we will get the worst. No businessperson would approach a major challenge fearing to fail, our actions are predicated on our belief we will win or fail we will.

Schemes such as John O’Higgins’ or the USS are not intending to fail either, and it is good to see senior brains waking up to the opportunities that what some see as existential threats, might bring.





The original FT article referred to in this blog can be found here


About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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5 Responses to “Breaking ranks” with a pernicious orthodoxy.

  1. neil walton says:

    Whilst it’s useful to highlight the problem that internal perceptions constrain what pensions experts and their clients discuss and act on, adjusting the discount rate or blaming LDI is, in my opinion, not the answer. The problem is the question that everyone is focused on.

    Pensions are long term entities so the ephemeral balance-sheet question of whether the accumulated assets are more than or less than a subjective discounted value placed on the liabilities is irrelevant. The true question should be, “What actions can be taken so that schemes deliver the future pensions to members when they fall due?” When we start discussing that the industry might find a way forward.

  2. henry tapper says:

    Neil, I don’t think I can pick my way through what you are saying, can you make your point more simply?

    • neil walton says:

      Henry, My point is that measuring a scheme deficit and worrying about how it changes is a waste of time. – Equivalent to arguing about how many angels can dance on the end of a pin.
      We know what schemes have to deliver in terms of future pension payments. So lets start working out how we use the schemes assets and future contributions to deliver those promises.

  3. henry tapper says:

    I agree with that

  4. dearieme says:

    It would be helpful to me, Mr Tapper, if you were to report the headline on that FT article.

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