The Financial Scientologists


Paul Lewis is absolutely right in attacking the dogmatism that religion creates. People may be spiritual, without imposing their views on others, but when someone’s dogma overtakes their sense of humanity, they become strangely inhuman.

This is what accounts for John Ralfe’s duality. He is in real life a perfectly nice bloke who likes Bruce Springsteen, enjoys cricket and glories in the countryside around Nottingham. I would gladly spend time with the human being – John Ralfe.

Unfortunately, John’s duality contains another person altogether. As he prepares to address his 2000 followers in the hallowed halls of twitter, he dons the coat of financial scientology.

I did not realise that John is a financial scientologist until I read this exchange with Dennis Leech yesterday.

Financial scientology

Dennis has hit – perhaps accidentally , on the cause of John’s divisiveness. I don’t know much about the science of financial economics, but it’s clear that it is an “ology”. I don’t know much about Scientology either – though their church is near me in Blackfriars.

Both Scientology and the religion of financial science appear to overtake normal happy people and create completely different people espousing stuff that makes no common sense.

To make Dennis’ argument graphically, we use this diagram

life cycle open

What it shows is that a collective pension scheme finds life difficult if it closes and easy if it stays open. That is because benefits are paid from income with an infinite time horizon and the market value of the assets are irrelevant.

Close a scheme and you have the problem of having to sell assets to pay benefits with a shortening of time horizons. This is the hard problem that people face with DC and it’s why DB schemes find it so expensive to wind up.

John Ralfe often explains the cost of buy out to justify why he considers that open DB schemes like USS are in deficit. This is because financial economics cannot accept that market values are irrelevant to “open” collective schemes. They need to be valued on the capacity of their assets to meet future bills (e.g. pensions).

This seems to me, someone who is neither actuary or economist, to make common sense.

What would happen in John lost his religion?

The frightening hold that financial scientology has on John may have no remedy. Since it cannot be cured by common sense, it looks like John will remain a latter day Malvolio to whom Toby Belch can tease

Out o’ tune, sir. You lie. Art any more than a steward? Dost thou think, because thou art virtuous, there shall be no more cakes and ale?

It is very hard not to feel sorry for Malvolio and it is very hard not to feel sorry for John Ralfe, at least the John Ralfe who puts on the cloak of financial scientology.

But as far as I know, Malvolio was always Malvolio, he did not enjoy Bruce Springsteen, or walk on the Dales or watch cricket.

My hope is that John will somehow forget where he hung the cloak of financial scientology and that someone puts in the charity box. Then – for sweet charity – that box is lost and burned and that John never again has to “insist on the science of financial economics”.

Because John is a really good bloke who is trapped by his dogmatism. Perhaps I should put him in a room with Paul Lewis.

That would learn him.



About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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7 Responses to The Financial Scientologists

  1. Con Keating says:

    The form of financial economics which John Ralfe, the pensions pathogen, promotes is no science. Its assertions are self-referential and unfalsifiable as he well knows – if a theory does not make falsifiable predictionsit cannot be considered a science.

    • henry tapper says:

      I think you take a dimmer view than I Con. For me John is deluded, perhaps infatuated – but i don’t suggest he is perpetrating what he considers falsehoods.

  2. Mark Meldon says:

    Beware ‘gurus’ of any kind in the financial sector! Don’t get me started on the pseudo religiosity of cashflow modelling ‘preachers’ I meet who use their mumbo-jumbo to justify astonishing fees!

    Really, what on earth is the use of these software packages (and so-called stochastic modelling)? I think they are all bollocks, and I’m very happy to be shot at for saying so.

  3. Stephen Glover says:

    I was talking to the CIO of one of the largest DB schemes yesterday, which also happens to be in surplus. I posed the following question: “If you were 99 percent sure that equities would outperform bonds over the medium term, would you increase your allocation to equities?”. The response: “No, because I don’t need to. We are certain to meet all our pension payments so why take on any unnecessary risk”. This, as I understand it, is very much the John Ralfe position. It represents the most draconian way possible of valuing a DB pension scheme, based as it is on the assumption that the fund could meet all future pension liabilities if the sponsor went bust tomorrow.

    The best defence of the capitalist system, from Adam Smith onwards, is that it enables savings to flow to their most productive use. Well, this is certainly not happening in much of pensions and since the financial markets crisis it is not happening at a macro level either, in the form of QE and other asset purchasing distorting the rates which have swollen pension liabilities in the first place. A double whammy if ever there was one.

    Markowitz, Sharpe and Miller shared the Nobel Prize for Economics in 1990. I don’t understand why their work is not cited far more often in these soul-searching pensions debates. It has the merit of being quite easy to understand and being rooted enormously in common sense. Among other things, they demonstrated that equities and other higher risk assets outperform bonds and cash over time. We have them to thank for, among other things, the notion of the risk free rate, the building blocks of portfolio construction, the capital asset pricing model and the efficient frontier, all of which changed the face for investing forever and made it far more efficient to the benefit of all (except for brokers who were coining it with fixed commissions prior to the Big Bang in the mid-1980s).

    One of the consequences of the work performed by them and others on asset allocation is this seeming paradox: it’s easier to predict investment returns across risk assets over the long term than it is over the short term. Stock prices, for example, follow a random walk in the short term. In the long term they will deliver a premium above low or no-risk assets. If you don’t believe in this then you don’t believe in the entire capital market system, period. The closely related investment shibboleth is that you cannot achieve excess return without assuming more risk. So the ‘right’ risk risk is good, and vehicles with long term liabilities – e.g. DB pension funds – are well placed to assume it.

    I suspect that when most people consider risk they have in their minds the risk of permanent capital loss. Whereas investment risk, especially in the world of Sharpe et al, is a measure of volatility. This encompasses the ‘risk’ of outperforming as well as underperforming.
    What this means in practice is that equities will assuredly outperform bonds and cash: it will just be a bumpier ride. But if you’re in it for the long haul, you needn’t pay attention to the bumps.

    The Norwegian state oil fund, on any given day the largest SWF in the world, was down more than $90 billion(!) at one point in the aftermath of the financial markets crisis. Yet they stuck to their beliefs in risk premia and recovered all of that and more when the markets bounced back. And of course, if they had not been invested in risk assets in the first place, they would never have had the $98 billion to lose.

    By similar token, by the way, valuing DC funds on a daily basis cuts enormously into long term performance.

    So actually we do have an ‘ology’ of sorts. It called Modern Portfolio Theory. It makes a lot of common sense and isn’t followed enough. This is financial economics which was deemed worthy of the Nobel Prize. I don’t want to be naïve, but I submit that suggests there’s something in it.

    Why isn’t it applied more broadly? I suspect you need to follow the money. There’s a hell of a lot of it in providing LDI strategies and de-risking advice.

  4. henry tapper says:

    Excellent response! IMO

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