This blog first appeared in Professional Pensions, if you’ve read it before, read it again.
“What we observe is not nature itself, but nature exposed to our method of questioning.” W. Heisenberg, Physics and Philosophy: The Revolution in Modern Science
Prudence demands that we avoid monocultures, an absence of diversity, because of their risk of mono-causal catastrophic failure. With trustee boards, we seek diversity of experience, gender, ethnicity and qualification in order to avoid ‘groupthink’ and foster a multiplicity of views. However, we have only one highly prescriptive regulatory framework, and a requirement to comply.
Closely examining an elephant will result in disparate views, which may be difficult or impossible to reconcile without the benefit of some wider perspective. As David Bohm noted:
“One may indeed compare a theory to a particular point of view of some object. Each view gives an appearance of the object in some aspect. The whole object is not perceived in any one view but, rather it is grasped only implicitly as that single reality which is shown in all these views.”
Regulation imposes its own particular worldview, and does not cope well with indeterminacies, promoting a closed narrative. The fundamental theorem of asset pricing, the heart of the market-consistent paradigm, is a prime example of a closed narrative; it was conceived to link and unify many existing but unconnected theories. In doing so, it closed them. Theories deployed hegemonically, as when embedded in regulation, block or discourage other approaches and thereby the scrutiny of other aspects of reality. For pensions, alternate approaches to valuation, such as cash flow projection, are excluded.
To quote Edward Fullbrook**:
“Closed narrative communities typically live in open hostility toward ‘alien’ narratives. … Advocates of closed knowledge narratives often publicly embrace an extreme and primitive form of philosophical idealism, whereby they declare that their conceptual framework rather than offering a point of view on a domain, determines the extent of that domain.”
The zealotry exhibited by market-consistency advocates demonstrates exactly this.
“A knowledge narrative may become invert, meaning that instead of being used mainly as an instrument for explaining reality, its focus becomes itself. Turning away from the empirical phenomena that inspired it, it becomes transfixed with its own existence.”
The Regulator’s view of risk now dominates; it is far from natural. The collective fixation on scheme deficits, liability-driven investment and de-risking is one example; calls to scrap dividends and fund deficits are another.
A further caution is necessary:
“a social-science conceptual system can alter the objects of its enquiry by becoming part of the conceptual and belief apparatus through which humans define themselves, perceive others and make choices.”
In the sphere of pensions, closure to new members and future accrual lead directly to higher pension costs and ultimately cash flow deficiencies, reinforcing the view that DB pensions are unaffordable, as does the pursuit of self-sufficiency or buy-out. The ultimate example must be the over-priced cash equivalent transfers of recent times.
The case for a plurality of approaches is overwhelming. It is the presence of both competing and complementary narratives that fosters understanding, innovation and development. It is a necessary condition for the ongoing provision of occupational DB pensions, which regulation, with all of its prescriptions and ‘guidance’, has suffocated.
All of this said, the prospect for imminent change is limited. As Max Planck noted:
“A new scientific truth does not triumph by convincing its opponents and making them see the light, but rather because its opponents eventually die, and a new generation grows up that is familiar with it”.
Whether there will be any occupational DB pension schemes still open at that time is an open question.
* A narrative is a spoken or written account of connected events. This includes the theories, paradigms and concepts of financial analysis. Knowledge narratives are those commonly taught in universities.
- **Edward Fullbrook, Narrative Fixation in Economics, World Economic Association 2016. In this article, I have borrowed extensively and unashamedly from this work. I have read and marked my original copy so extensively that I bought a second copy.