Two things happened on Sunday that made a difference to my thinking on the pensions. the first was spending a day on my boat with Andrew Young and extended family. Andrew more or less designed the PPF and as deputy Government Actuary had responsibility for the way that the state pension survived the ravages of political interference. Spending time with this great man was a privilege, along with Bryn Davies, Con Keating , Hilary Salt and Derek Benstead, he represents a school of thought that I aspire and admire from a distance.
The second thing was reading an opinion piece by Martin Wolf, eminence gris of the FT who has picked up the torch lit by Josephine Cumbo arguing for a return to collectiv pension provision in the UK.
The old is dying. But the new is miserable. The country needs large collective funds free not just from the conflicts of interest of old DB schemes, but also from the insecurity of DC schemes. This can be done. But policymakers must first dare to think far more boldly.
Until recently, the FT relied, for the financial economics of UK pension schemes, on John Ralfe. The lockdown of pensions advocated by Ralfe is blamed by Wolf for not just closing defined benefit accrual but for starving the UK’s capital markets of funding.
To understand how radical the FT has become, read Woolf’s opening gambit.
the UK…. has jumped from one “corner solution” — defined benefit plans — to another — defined contribution plans. The best positions are rarely to be found in corners. It would be better to adopt schemes that pool risks, as DB schemes do, but keep some of the flexibility of DC schemes.
Wolf’s proposals go further than the mass adoption of CDC as a way forward. He argues for a consolidation of Britain’s DB legacy into perhaps four super schemes. Employers would be subject to their existing obligations under deficit reduction plans but no more with the PPF interacting with these super-consolidators with employers paying the PPF levy as an insurance policy.
This is precisely the radical thinking that Andrew Young has immersed himself in in over the twenty years since we met and we are not alone.
Bryn Davies now sits in the House of Lords, Andrew Young has an OBE and we have a pensions minister who sees the world through Wolf-tinted glasses. Guy Opperman is only too aware of the failure of DB schemes to fund Britain as it once did.
Instead of funding Britain’s public and private capital markets, our DB pension funds just pour money into debt , with disastrous consequences for funding both of pension liabilities and of long-term investment in the British and global economy.
The consolidation agenda , outlined by the DWP’s “improving member outcomes” initiative is commonly though of as aimed at DC pensions. But similar initiatives are underway across the board. Consider the licensing of superfunds to consolidate small corporate DB plans or the asset pooling going on in LGPS. Anyone interested in looking at all these issues in the round should join us for an afternoon of positive debate.
Why Sunday cheered me up!
Sometimes it is easy to get depressed by the state of UK pensions, but I arrive at the beginning of a new week with the joyful memory of a sunny day on the river with a kindred spirit and with the mental stimulus of Martin Wolf’s lucid opinions.
The FT is a barometer of the prevailing consensus. I believe that Britain is turning a corner and moving away from the “corners” into which pensions have been pushed.
To extend the metaphor, the FT is putting pension schemes back where they should be – center stage.