Happy Christmas – VAR is over.


The conventional approach to pension scheme asset management has been a powerful instrument of mis–education. Consultants and trustees are taught about matching assets to liabilities, the use of standard deviation and the Brinson axiom. They may be told something about risk and then are hurried on to the next question, in the hope that they will not realise that they are actually faced with uncertainty.

Before they ever do ask, the consultant has become head of his firm’s asset practice, the trustee has become chairman of his board and the Regulator has issued a code of practice: and so sloppy habits of thought are handed on from one generation to the next

So concludes a devastating critique of the central 3 received ideas of investment consultancy by John Woods (On the political economy of UK pension scheme regulation).

If you’d like to know how to get hold of this article , please contact

Guy Edwards  Senior Publisher  Law, Humanities, and Social Sciences Journals | Oxford University Press, Great Clarendon Street | Oxford | OX2 6DP www.oxfordjournals.org

Thanks to Professor Dennis Leech of Warwick for drawing this article to our attention.

The paper goes some way to explaining why the FCA’s Asset Management Market Study came into place. It argues from an academic viewpoint, what FAB index tells us  in practice, that the adoption of a mark to market approach to pension scheme valuations has so distorted the investment process that we are now ruining not just defined benefit pensions , but the productivity of their sponsors.

Short – termism

I will leave it to Con Keating who will be blogging here in a few days, to properly explain John Woods’ paper. I have read it and mostly understood it, but I am more concerned  with the use  of these ideas.

Con can retrace the steps taken by the consultants , trustees and regulators to discover why we have an unproductive PPF, pension schemes that suck money from employers who would rather invest in people and plant and individuals who are cannibalising what’s left of the schemes through the taking of artificially exaggerated transfer values.

Wood’s hypothesis is that the failures of “the conventional approach” have shifted an investment strategy into a “speculation strategy”. We speculate on market movements rather than invest for future cashflow calls. Evidence of the short-termism that prevails can be found in the updates from the investment consultants.

Since the concern is the next IAS accounting number or at best our next S179 funding valuation, our concerns are for the immediate outlook for the various strategies we might consider. Rather than adopting an investment strategy based on meeting cashflows, we are asked to constantly review our strategies according to short-term outlook documents.


Hope for 2017

This blog is being published on Christmas Day 2016 (happy Christmas!). I hope that 2017 sees a reversal of the process described by Dr Wood.

I do believe that the attitude of those who Govern these things, are seeing the need for change.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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3 Responses to Happy Christmas – VAR is over.

  1. Mike Otsuka says:

    Thanks, Henry, for drawing our attention to the piece by John Woods. I’ve just written a brief blog post, entitled “Stocks match pensions liabilities as well as bonds match them”, which draws attention to one small strand of argument in this rich article: https://medium.com/@mikeotsuka/stocks-match-pensions-liabilities-as-well-as-bonds-4d7dc9179917#.pj15b823n

  2. henry tapper says:

    Thanks Mike

    Do I have your permission to publish in full on my blog?

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