DB and what’s possible (thoughts inspired by Con Keating).


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.



About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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4 Responses to DB and what’s possible (thoughts inspired by Con Keating).

  1. George Kirrin says:

    Another thoughtful read, Henry, for which grateful thanks.

    If I may, however, pick up on just one point:

    You say “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.”

    The order in which you place the sponsor’s capacity and the assets entrusted to and/or selected by trustees is what troubles me. If you rank the sponsor covenant first rather than what I might term for now “the asset covenant”, you seem to me to play into the hands of the covenant advisers and their supporters, many of whom seem to be found among the actuaries and auditors etc.

    Why are trustees not expected in the first place to do rather better with the assets they have and might have, with the sponsor’s role made secondary not primary, as a top up or provider of bridging finance?

  2. Con Keating says:

    George. We should not worry about mark-to-market itself – that is an arbitrary standard. However, we do need to worry about management actions based upon the deficits arising under mark to market. These are usually costly and wasteful, and of course they are by and large promoted by the authorities. The most egregious example is the CETV. These pensions are no longer so much deferred pay but rather a call option on market performance – the discount rate market.
    The trustees of DB do not have an obligation to chase asset performance and they should not. This is not true for DC in the case where the trustees make (active) investment decisions for the members – here that is a responsibility. The reason that DB trustees have the simple “secure the benefit” requirement is that these benefits are fixed, meaning that members would not participate in the upside, whereas with DC clearly they do.
    There is a gross misunderstanding at large in the pensions world – that it is the final pension payments which are in some way guaranteed. This is not the case, though many assert it to be so. The purpose of funding for occupational DB was to secure the member benefit as they had accrued to the date of valuation – this is security of the promise originally made. I covered this in the valuation of liabilities. Another purpose of scheme assets is to defray the cost of providing the promise made.
    There is a real problem with funding if we were to wish to take things further and have the scheme funded to such a level that it would pay the pension should the sponsor default. This idea that trustees should consider this is misconceived. We should understand that insolvency is a rare event; there is a low probability of it occurring. The majority of schemes (now that most are in run-off) will not end in default. To have all schemes funded to such levels is grossly inefficient. There is a simlar problem within a particular scheme. The best estimate is the appropriate but we overfund to allow for uncertainty. For the majority of outcomes this overfunding is excessive – and those funds rightly belong to other creditors. The reason I favour insurance is that it precisely solves these issues.
    A scheme funded as the levels I have described is consistemnt with trustee obligations and with insurance added could even resolve the guarantees of pension payment if that is really desirable.

    • George Kirrin says:

      Noted, thanks.

      I wasn’t suggesting trustees should “chase returns” but rather avoid investing in very low returns, unless necessary (eg buyout is imminent).

      I’m old enough to remember trustees in the 1980s and 1990s had small surpluses “to spend” because of Inland Revenue limits, and some of this spending went on one-off (or more foolishly “annualised” augmentations) increases to pensions in payment.

      I think we both know that standing revaluation increases pegged to RPI or CPI or LPI do not necessarily compensate pensioners adequately, particularly the older they get.

  3. Phil Castle says:

    A very well drawn together summary of ideas. Thanks. It makes me think of the auditors in Terry Pratchet books or the Dementors in Harry Potter where the solution to a problem becomes a bigger problem or the old lady who eat a fly…….
    My standing joke when explaining to clients that I havent’ saved enough to retire early (but I will probably work until my son who works with me tells me to stop coming in to the office and annoying everyone) is to say as I get older I’ll just take up more extreme sports to reduce the need for Long Term Care (I ended up in a tree when I did a static line parachute jump for instance).

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