“A hit – a very palpable hit”, cries Osric as Hamlet lances Laertes.
So reads this triumphal supertweet to the Bondanistas.
1 A DB pension promise has the same economic characteristics as as long dated secured bond.
2 We know how to value long dated secured bonds, using AA bond rates.
3 Therefore we know how to value DB pension promises, using AA bond rates.
4 It’s as simple as that.
— John Ralfe (@JohnRalfe1) May 30, 2018
John is so proud of his “hit”, that he’s pinned it to the top of his tweets. He’s had plenty of adulation for the profundity of his logic…
True and utterly uncontroversial. Anyone who disagrees should keep quiet and trade on their superior information.
— Michael Savage (@GrumpyArt) May 30, 2018
But of course, like Hamlet’s, John’s logic is both self-defining and self-limiting. It demonstrates the paucity of the financial paradigm (bubble) that he has created for himself.
It also explains why he is so completely wrong about pensions.
Some “superior information”…
Who are right about pensions? Well the people who roused the leviathan Ralfe from his slumbers! Step forward Red Actuary (aka Hilary Salt) with a tweet that “pricked the sides” of Ralfe’s intent.
— Hilary Salt (@RedActuary) May 30, 2018
Wilkinson and Curtiss’ elephant is in a very big room, indeed it appears to be roaming the planet- unconstrained by bonds!
In case you might consider Tim Wilkinson – a dilettante – consider his linked in profile.
In case you might consider Frank Curtiss – delusional – consider his linked in profile.
For those who do not have access to Professional Pensions’ excellent site, let me quote you the gist of what they are saying.
Discount rate controversy is nothing new. One rarely, if ever, hears people in the industry say that using the yield on high quality corporate bonds (as accountants do), or a rate just above gilt yields (as most actuarial valuations do) is without problems.
But the flaws are more serious than many realise. The theoretical case for these rates is acutely defective. They have wrecked company balance sheets, caused the misallocation of billions of pounds of corporate resources to plug illusory deficits, distorted scheme investment strategies, and played a major part in the collapse of private DB provision.
If a disaster even a fraction of the size had befallen the state pension system, governments would have been voted out of office. It’s a national scandal.
In my view, and the view of those who I hold dear, Wilkinson and Curtiss are right and JR is wrong.
The mind forged manacles…
The refined elegance of John Ralfe’s tweet, belies the paucity of his imagination. When we imagine a pension system, we do not have the fixed duration of a bond in mind. Our time horizons are limitless. Unless you see the world as Chicken Licken (for whom the sky is persistently falling on our heads), you imagine that there will be a 2068, a 2168 and a 2268. At these dates there will still people getting too old for work who will look to a pension to replace income they cannot or will not earn.
The bond that we are being urged to buy in 2018, will have expired by 2038, but the pension I start in 2018 – will – according to our death calculator, still be paying out 30 years from now. I will outlive my long-dated bond.
My son, who is likely to retire in around 50 years, will have no interest in the 20 year bond rate in 2018. Nor will his children (my grandchildren) who will not retire until well into the next century.
Of course none of this stuff about my family may happen, but I can reasonably expect it will. My friends will- in probability – live past three score and ten – so will their families.
Duration of liabilities is as infinite as the prospects for the human race. We cannot contain ourselves to the duration of a long-dated bond, we must think beyond that.
This John Ralfe and his acolytes refuse to do. So time-limited is their vision of the future that they insist on insuring against the worst possible eventuality (see Chicken Licken) day by day.
This is why they cannot countenance linking pension returns to the GDP of our and world economies by investing in equities. It is why they berate the state for issuing promises to pay for pensions based on future taxation and it’s why they have prohibited employers from granting retirement promises to current and future staff.
This limiting vision of the “bondanistas” is utterly lacking in faith. It is the world that William Blake described in songs of Innocence and Experience
I wandered through each chartered street,
Near where the chartered Thames does flow,
A mark in every face I meet,
Marks of weakness, marks of woe.
In every cry of every man,
In every infant’s cry of fear,
In every voice, in every ban,
The mind-forged manacles I hear
Mark to market – mark to woe.
Right of reply
— John Ralfe (@JohnRalfe1) May 30, 2018