This from City AM’s Josh Mines

The pension deficit of the UK’s 350 largest companies tumbled by a huge £16bn over the course of May, figures out today have shown.

In just one month, the FTSE 350 pension gap fell to £34bn, having already been slashed from £72bn at the start of the year, and £156bn in September 2016.

To which Mercer (who produced these numbers) have commented

While this is more welcome news, recent market volatility sparked by the political situation in Italy serves as a timely reminder of the speed at which things can change. We increasingly see schemes having an action focused risk and cost management plan.

Such a plan will be clear on the conditions under which specific activities will be warranted, e.g. member options, insurance market solutions, and cashflow matching asset strategies. Increased market uncertainty, as we are seeing at the moment, then feeds into this plan and consequently the sequence of activities.

When did Risk become such a menace?

In a long and sometimes brilliant article in the American Actuaries magazine “Contingencies”, Hilary Salt points out.

What the word “risk” means to society broadly has changed significantly over the past decades. At one time, the word was a relatively neutral one—there were both negative and positive uses of the concept of risk-taking.

Today, society uses the term “risk” almost exclusively to mean a downside risk. An interesting illustration of this phenomenon is that the latest ISO 9001 quality standard regulations require organizations to provide evidence of their management of both risks and opportunities—the ultimate bureaucratic pronouncement that “thou shalt not see risk as a good thing”—so you need a different name for “good” risk.

Clearly what has been occurring lately has been “good risk”, schemes that have been in a position to benefit from the 10 year bull run – have done. Ironically, many schemes that have closed to future accrual, have embarked on strategies that do not benefit from equity growth and have not benefited from “good risk”.

Later in the article, Hilary Salt expresses her frustration, as forcefully as an actuary can in such circumstances.

The use of possibilistic models has had a real impact on pension fund investment strategies, in particular on trustees’ and sponsors’ sensitivity to risk, and has tended to push schemes to reduce their allocation to growth assets in favor of bonds. The average allocation to bonds in 1990 was 13 percent; in 2015, this had more than doubled to 31 percent. Over the same period, investment in equities fell from 70 percent to 41 percent.

Salt concludes her section on UK pensions with the comment

This position is, for me, frustrating. We have moved away from a position where collective defined benefit pension schemes could provide pension benefits efficiently and also form a pool of assets for productive investment in business. For collective schemes open to accrual and new members, the income of new contributions and the fungible nature of money means day-to-day fluctuations in market value are not important. But we’ve forgotten this thanks to an over-focus on risk.

Good risk – last night.

I was one of very large collective in Victoria Park last night to witness first Patti Smith and then Nick Cave produce fine sets. The latter included a rendition of  where the Wild roses grow which I insert here for the sheer pleasure of reliving it!

In the penultimate song of his set, Cave invited a couple of hundred of the crowd onto stage and then spent much of the next ten minutes making a “difficult” perambulation through the crowd.

I was at the front and spent some time in close contact with Cave as he struggled to conclude Stagger Lee’s epic battle with the devil

He put four bullets in his head,

bang bang bang bang.

Cave’s final song – Push the Sky Away –  defines “good risk” for me  . Like Stagger Lee, Cave won’t let the sad things that have happen to him drag him down.

Cave emerged from us to sing the song, much as he did in the video below (taken last week in Paris)

Hopefully, there is enough good risk left in our pension system, to ensure the same.

With good risk, we can push the sky away.