The democratisation of risk?


Feeding in a time of plenty

I can’t say I’d heard this phrase before Bruce Porteous of Aberdeen introduced it into conversation at yesterday’s Westminster Business Forum.

The only reference I can find to it on the web is a sneering jibe at “Cowboys in Superland” back in 2002.

The stock market boom was fueled by retirement fund money, now it’s crashed and retirees are angry.

Capitalism may have to be reined in again to protect ordinary people’s savings

It’s been a long time since we’ve seen a real fall in people’s savings.


The FTSE 100 since the introduction of auto-enrolment

So now is a good time to herald the risk transfer from collective to individual using the glowing term “democratisation”.  I asked Bruce and the panel he was on – what they meant by the phrase

“democratisation of risk”

but that was too hard a question to answer with  a coffee break approaching.

The hardest nastiest problem in finance

Asking ordinary people to provide themselves a wage for life (aka pension) from a retirement pot may be what Bruce was referring to. It’s certainly what the acerbic Aussie was referring to.

David Harris (a genial Aussie)  has commented on the phrase since this blog was published 

Mentioned in Ireland 2014 against a backdrop of likely pension reforms. Also highlighted in the debates around the privatisation of US social security between 1997-2000. Also linked with the sharp decline in DB in Australia. Reality is risk moving onto DC member as employer /plan sponsor reluctant to have it on balance sheet- global markets/competitive

If “democratisation of risk” means dumping on the individual the anarchy of market forces, then the phrase “the abnegation of risk management” seems more appropriate.

Pot or Pension?

Later in the morning, the Westminster Business Forum heard from Terry Pullinger of the CWU about how 89% of his members voted against a “pot” and for a “pension” (a wage for life). They turned down a pot from a Zurich managed DC scheme and they turned down a pot from a self-administered cash balance plan and they voted for a scheme that paid a pension.

Terry’s overwhelming good humour turned a dry affair into a morning of good natured debate. If you want to see what I mean , you only have to watch one of his videos – like this one, where he announces the mediated settlement the CWU and Royal Mail have come to.

In my opinion, the scheme they voted for, a collective defined contribution scheme, really would democratise their risk.

Because – instead of leaving each individual postal worker , in the employ of Royal Mail, to take the market risks and the risks of their living too long, the union and employer are embarking on an experiment in mutuality where the risk to the employer will be confined to paying a defined contribution and the market and longevity risks will be pooled between the members of the scheme – both pre and post retirement.

This does not eliminate the hardest, nastiest problem in finance, but it makes it a lot easier to manage.

When the crash comes

So far, we have only seen rising markets , since the democratisation of pension saving (aka auto-enrolment). No-one has had cause to worry that the pots they have built up have gone from full to half-empty. But this will happen.

When that happens, some of the drawdown strategies in place, will fail. They are not sufficiently robust to survive the sequential risks of a sustained downturn in markets.

When the pot falls before retirement, pounds cost averaging can recover the situation, but if it falls in retirement – where pots have negative cash-flow, there is no such salvation. Paying a pension over time is not called the “hardest, nastiest problem in finance” for nothing.

So when the crash comes, and it will come several times in the savings careers of the younger auto-enrollers, there will be great gnashing of teeth, and John Ralfe will be telling us so – for not buying annuities and those who talked about the “democratisation of risk”, will have retreated to their city offices.

I thought of Terry Pullinger a bit like Noah, there he was with his big staff and his big boat beckoning everyone aboard his Ark. Meanwhile, the rest of us were basking in the glorious sunshine of a sustained heat-wave.

Flood? – My arse!

Of course we know what happened next!

At the end of the morning, as we broke to go home, I asked Terry’s panel – the Chair and the audience another question

Is there anybody in the room that doesn’t wish Royal Mail and CWU the successful realisation of their plan?

As with my question about the democratisation of risk, I got no reply.

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 The democratisation of risk?

  1. Robert says:

    Good reality check on rising markets and the performance of the FTSE 100 since the introduction of auto-enrolment where no-one has had cause to worry about the pension pots they have built up. As you rightfully say the ‘crash will come’ and some of the drawdown strategies in place will fail as they are not sufficiently robust to survive the sequential risks of a sustained downturn in markets. This is where Defined Benefit schemes like BSPS2 should prove their worth as they are better equipped to deal with stock market volatility. As a steelworker I (and probably many others) was unaware that when a Defined Contribution pot falls in retirement (where pots have negative cash-flow) pounds cost averaging cannot recover the situation.

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