Con Keating published a blog on here yesterday ; Procrustination; Con Keating on JLT’s black hole. It’s demanding and many will leave it alone as too hard. But it is sets out the position of many of us who are increasingly worried by a call to consolidate the DB schemes we’ve created over the past 50 years to the benefits offered by the PPF. While this might create some economies, it would be at the expense of the promises made by generations of management sponsoring the schemes under threat.
This blog isn’t an attempt to rewrite what Con is saying (I urge you to read Procrustination) but it’s my attempt to articulate Con’s thinking as I understand it. As Con is one of many people I am learning from, I do not give him an exclusivity – but I’m very grateful to him for helping me.
I often need Con to help me understand where my head is. Con will often adopt extreme positions (such as expecting schemes to be unfunded and simply rely on insurance of the employer covenant).
You can work back from this to what ordinary people can expect from employers in keeping DB promises.
We shouldn’t worry too much about the mark to market valuation, we should worry about the capacity of the sponsor to make good the deficit if it persists and worry about the capacity of the assets to make good the deficit otherwise.
Am I worried about not being paid my DB pension? – NO!
If there was no PPF, I’d be really worried, to me the PPF is a safety net which should allow trustees to take more risk, knowing that a slip on the high wire would not lead to disaster. Without the high wire show, would anyone be interested in the first place?
JLT seem to want a low-wire show without imagination or ambition. But the people who started these DB schemes (including Beveridge) did so because they believed in the capacity of the employer to see the enterprise through. That included the State.
It seems we take a different view, where the need for good quality pensions does not cease at some pre-determined point in the future (call it wind-up) but persists for generations to come.
The state pension is a high-wire show, but it is not – John Ralfe and his friends call it – a Ponzi scheme. Were another generation of tax-payers to stop paying national insurance to meet the demands of our parents, we would find there was no money for our state benefits.
We rely on intergenerational transfers whether we like it or not, we have to live in hope! But we don’t have to worry about Ponzi, for Ponzi is not representative of society as a whole.
Of course Ponzi was a crook, there were no new investors and ultimately he got found out, but that is not what happens in society. The employers I advise are busy recruiting the graduate and apprentices and graduate apprentices who will be the pensioners of 2067 (or whatever). Those kids are building up their entitlement to state pension as they snapchat away. As they pay their NI , they fund my aging father’s pension. But they will have kids who may retire in 2100 and there is no supposing they will not pay their taxes for the apprentices of today.
One of the great reliefs of the past twenty years is that we have taken the state pension out of destitution, cleaned it up so people can understand it, and are now upgrading it year by year via the triple lock. This is a magnificent public investment which generations to come will look back on – and thank us for.
At some point we will revitalize occupational pensions as we revitalized the state pension. It will be at the point when we realize that if we don’t, we will have a generation incapable of productive work but incapable of stopping work. Society demands reasonable force be taken to ensure that there is sufficient self-sufficiency for the state to provide a safety net for the inevitable stragglers.
The PPF performs the same role at a corporate level. We have to assume that companies , any more than individuals, do not plan for destitution!
Where does this terror of the future come from?
In another blog, Con has written about how organisations can create a specialist narrative which explains the world in their term, Redington have done it and use Mallowstreet to promote it. JLT are part of that narrative. Con cites Edward Fullbrook who explains how these self-enclosed worlds perpetuate themselves
“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.”
I think it’s wrong to say that Con dislikes JLT or Charles Cowling, I don’t think he gives a damn about them!
What he dislikes is the closed narrative community of which JLT are a part. I’ve written that I think JLT are using fear to ensure their own survival. If Cowling cannot convince FDs that the DB scheme is an existential threat to his business – his job and his reputation are at risk. Worse – he has no way of getting paid – for there is nothing on the upside of his activities generating any value.
I’m reminded of a colleague’s experience with a wonderful charity who (thanks to its chair of pension trustees ) had decided that the buy-out of the DB scheme was an a priori condition for the Charity’s ongoing operation . My colleague had to walk away, he couldn’t manage the consequences of putting the scheme into bond lock-down. It was – for him, a perversion of reality.
This perversion of reality is a failure of the imagination. Imagination is the only tool we have to properly understand this problem
A favourite poet of mine – Andrew Marvell wrote these great lines while contemplating in a garden
“The mind, that ocean where each kind
Does straight its own resemblance find;
Yet it creates, transcending these,
Far other worlds, and other seas,
Annihilating all that’s made
To a green thought in a green shade.”
For Marvell , writing 350 years ago, imagination is the way out of the closed narrative. It is a different way of thinking to JLT’s – one open to new ideas and to what happens in the future.
Rather than worrying about what is to happen, it looks to benefit from the opportunities that come its way. Keeping an open mind to the future, we have to think that the need for income when we get old will persist and that the basic pension structures we are putting in place today, will grow and prosper over time.
That’s where First Actuarial (and Con) and JLT (and Cowling) differ. The much bigger challenge is around the corner, with the PLSA and with the recommendations in the DB Green Paper, which I suspect will be part of one narrative which we’ll oppose.
- Edward Fullbrook, Narrative Fixation in Economics, World Economic Association 2016.