“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.
This bubble is a solipsism, it entertains no views but its own, it explains John’s extreme narcissm.
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.
Half term reading for USS members: Death by discount rate: The fundamental flaws of the accounting approach to pension scheme valuation https://t.co/yDwJomfoJG via @profpensions
— 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.
A man who understand the sky is not falling on his head
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
The biggest load of bollocks i have read in a while . https://t.co/HitFUcTzgU via @profpensions
— John Ralfe (@JohnRalfe1) May 30, 2018
Then again the Luddites of the Pension world who have not realized that a career is 4 years for most of the young might take a view of collective schemes, especially DB, first uttered by the Sage of Finchley
Spike Milligan:
The boy stood on the burning deck
Whence all but he had fled –
The twit!
I’m not aware that young people considered a career – “four years”! If we’ve burned their boats – then we’ve got something to answer for! That’s what my son tells me John!
Correct me if I am wrong, or over exaggerating, Henry, but didn’t John Ralfe’s “flight from equities” before he left Boots nearly bankrupt both the Boots Pension Scheme and Boots themselves?
I didn’t believe JR when I was a trustee where I worked. I still don’t!
Regards,
Robin
Yes, you can search and find articles on the subsequent history. Ralfe left Boots, the fund made a partial return to equities due to inflation, needed a bailout when Boots was taken over by KRR, and eventually closed.
Would you like to provide any evidence for this claim?
This Q is addressed to Schund
John is very upset by this comment which he considers “libellous”, I don’t know the ins and outs of the Boots scheme and John’s involvement in it.
We’re all free to have a view , John’s and mine (on this) could not be more different !
On balance I think it easiest for John to explain why your comments are libellous and then we can take a decision on a retraction!
You donât miss your target here â time horizon is the key difference in mentalities.
Interetsing this view of fixed duration v infinity as the argument advisers continue to have with teh F-pack is their removal of the right to claim a 15 year longstop defence for professional negligence, even when the sensible compromise of the longstop being linked to end of contract date i.e. for an adviser 15 years since advcie took place or ongoing advice contract was terminated by either party. By removing the longstop from the rulebook via FSMA 2000, it effectively submitted all advsiers to infinite claims, which cannot be quantified.
All advsiers like me have been arguing for is a change from infinity to a fixed term for claims and the logical one is the common law Longstop which is currently 15 years although the MOJ under Jack Straw were looking to reduce it to 10 years.
No adviser wants to find themselves having retired at state pension age, being persuaed by an ambulance chaser in their 80’s or 90’s in their wheelchair in a nursing home.
The burning deck is a interesting analogy. Are we jumping from it or to it? The flight to safety can (selfishly) be argued for a single scheme, but when taken in the aggregate the ‘flight-path’ transition of £3trn DB assets into gilts leads only way, to macro-economic stagnation. If we set low enough aspirations for investment returns, we will might just make them. for At a simpler level a Gilt is risk free when issued sparingly by the Govt, but the scale of gilt issuances inferred by the flight to safety envisaged over the next 15 years renders them anything but risk free; they become mere illusionary – lets stop calling them gilts, but call them for what they are – future taxation (loaded onto the future generations). The delusion is the belief that the young will be happy (or even in any way whatsoever capable) paying the level of taxation required to cover the gilts we are increasingly being forced to hold to cover DB pension promises.
Another few thoughts on the four Ralphisms, rather late on a Sunday evening.
A bond issuer surely expects to put the proceeds to good economic use, and actually earn more through expanding its business (or whatever) than the cost of the bond. Otherwise there’s no point. On the other hand, the logic of point 1 seems to be that any bond issuer should invest the proceeds in another bond, and so on – It excludes the possibility of there being any productive purpose in cash, other than to be a link in a pass-the-debt-parcel game.
So 1 doesn’t hold up, then 3 is wrong, and if 4 were true, why is so much being written about pensions?
I have engaged in the same intellectual debate without (I hope) trading insults. I believe there are in fact two equally justified views that are reconcilable by defining utility or welfare. Then one may be seen to dominate the other in that context and without generally invalidating the other.
It is very difficult to fault the theory of defined benefit pensions set out by Exley Mehta and Smith is 1997 – even though it was very inconvenient for my own views as a pensions managers brought up on normalised actuarial assumptions. I believe this predates the Boots decision, which was certainly consistent with the theory (except, I think, in using non-index linked gilts initially as a so-called hedge).
It is undeniable that I personally expected to be (and now am) happier and more satisfied with more wealth in retirement even if the risk-adjusted level of my wealth outcome is identical to someone less well off. I eat actual returns not risk-adjusted returns. I also now enjoy a wealth gain from having leveraged my house purchases even though my risk-adjusted expected gain was zero. I had to be confident I could live with the consequences of volatility along the way – both in portfolio values and in the impact of mortgage rates on our budget. John perhaps has made different personal choices, equally rational for him.
One of the basic principles of the ‘new theory’ of DB was that scheme’s utility was dominated by the funding status along the way, not eventual sufficiency outcomes. The consequences of funding variance are not easy to live with. Arguably this was not just a redefinition of an unchanged utility but the product of cumulative accounting, regulatory and legal changes (as pensions came to be seen as liabilities rather than aspirations). Members, if they had a different utility, could (the authors argued) hold equities or other risk assets personally. This was perhaps a little disingenuous but not exactly the stuff of irreconcilable differences.