“Spanish steps” – ideas on pension funding from Jon Spain.

jon 2Jon Spain is an eccentric brilliant actuary who has worked for many years worked at the Government Actuary’s department.

I am proud he has asked me to provide a précis of his response to Charles Cowling’s Sessional Paper to the Institute and Faculty of Actuaries.

I cannot yet publish Charles Cowling’s paper but have a PDF of the original which I would be happy to mail to any reader requesting it me on henry.tapper@pensionplaypen.com

Charles Cowling’ s paper provides the basis for the implementation and management of an integrated risk management framework.

While grateful to Charles & Co for spending so much time and energy, Jon wished it had not all been built upon such loose foundations. He said he was one of those cited in paragraph [1.1.2] who think that actuaries and trustees are being too prudent in their assumptions, leading directly to pension scheme liabilities being overstated.

In paragraph [2.7.2], it was surprising that trustees’ duties were defined by reference to a TPR document rather than to legal sources.

His main problems with the paper stem from the claim in section 4 that financial economics are relevant.

As financial scientists, actuaries need to follow the evidence. However, there is zero evidence whatsoever that financial economics can offer useful guidance for long-term entities.

Not only do market prices not have any predictive return power but also higher achieved investment returns must reduce costs for the same benefits being provided.

There is a huge concentration on risk as if it must necessarily actually crystallise, no probability being ascribed, especially in the publication of alarmist deficits.

As long ago as 1952, 65 years ago, Redington pointed out that avoiding losses is the same as avoiding profits, but there is rarely any reward recognition. Prudence can only be identified from the best estimate, which needs to be targeted more explicitly.

The long-term can imply different restraints from the short-term because one can’t simultaneously aim “long” and “short”.

Short-term volatility need not be regarded as problematic for trustees, so long as they reasonably believe that they have a long-term upon which to concentrate.

Path-dependence is really important and it needs greater exposure.

A fundamental problem is that risk quantification is very poorly captured by scalars.

Actuaries should recall that the discount rate is simply the inverse operator upon future investment returns. No longer the case, capitalisation was originally the only actuarial tool available but it obscures more than it reveals.

Discount rates are simple and simplistic, readily available to anyone and dangerous, whether in “wrong hands” or “right hands”.

Actuaries should stop using discount rates alone for long-term projects. Instead, we should be using robust ALM, enabling actuaries to inform their clients better, with clearer probability outcomes disclosed.

Finally, he agreed with the authors that the current DB funding regime needs reform but he thought that their solutions rest too much upon quicksand.

So he implored Council and Pensions Board to look at the basics again and to commission more work, reflecting the real world rather than pretending that mark-to-market can possibly help actuaries guide sponsors and trustees in this area.

In May 2017, Jon submitted a personal response to DWP at http://www.jonspain.com/greenpaper2017_db_dwp.htm.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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1 Response to “Spanish steps” – ideas on pension funding from Jon Spain.

  1. George Kirrin says:

    I would be very grateful for a copy of the Charles Cowling paper as a .pdf, please. I’ve tried the Staples Inn webpages without success, and also JLT’s pages.

    yours aye, George


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