Pensions or growth? Or both?

In 2022, attempts to de-risk UK DB pensions put the Government’s borrowing capacity in peril and led to an increase in borrowing costs for most UK citizens who now pay a “moron premium” on money lent to them. I challenge whether de-risking is anything but an attempt to pull up the drawbridge on the growth in our economy which is needed to pay our children’s and their children’s pensions.

The idea that pensions should run at no risk to employers or members is a half-baked pipe-dream of financial economists which has since Andrew Smith us convinced us to mark pension liabilities to the market rate (typically the long term gilt yield), has prevailed for 20 years. In the meantime, the now “guaranteed” pensions have consumed huge quantities of capital to manage notional deficits which have now become notional surpluses. The money spent on DB pensions has been spent at a price. As the Economist commented this month

People may see spending on health care and pensions as self-evidently good. But it comes with downsides. More people work in an area where productivity gains, and therefore improvements in overall living standards, are hard to induce. Perfectly fit older people drop out of work to receive a pension. Funding this requires higher taxes or cuts elsewhere. Since the early 1980s government spending across the oecd on research and development, as a share of gdp, has fallen by about a third.


Economic growth has fallen out of fashion. According to the Economist,  those in the oecd, a group of mostly rich countries, are about half as focused on growth as they were in the 1980s. It has  found a way of measuring this by studying party political manifestos and charting the results

“Modern politicians are less likely to extol the benefits of free markets than their predecessors, for instance. They are more likely to express anti-growth sentiments, such as positive mentions of government control over the economy”.


So , when looking for the reason we have decided to de-risk our DB pensions, we might conclude that that action precisely mirrors political sentiment that mirrors what politicians reckon is what we want.

But here we must define who the “we” are and in terms of pensions it is pretty clear that those who benefit from DB pensions in this country are those in the public sector and those who work for large corporates who are over 50. In short, those who have wealth in terms of housing, job security and a defined pension promise.

Not only are these people being provided with pensions that take little to no risk, they are protected by a massively over-funded pension protection fund that has far too little risk on its books and looks like a safety net without a tight-rope.

This morning’s headline tells a sad story of the consequence of pulling up the drawbridge on “growth”.

It doesn’t have to be like this.

Defined benefit pension schemes have assumed ascendancy in the priority order for payment from corporate cash flows and have been encouraged to take advantage of these privileges accorded them by regulation and reinforced by the enforcement of the Pension Regulator’s powers.

There is now a queue of well funded schemes (but also schemes like BSPS that are coming our of PPF assessment and are labelled “PPF+” which have no greater ambition than to be bought out by insurance companies. In the short-term , this will consume more corporate money as the schemes prepare themselves and advisory and transactional fees stack up. In the longer term, the money backing the pensions will be transferred into the management of insurers who will be required to manage the transferred funds conservatively and with no regard to “growth”.

By comparison, superfunds, whose promise was to manage long-tail liabilities by investing for “growth” in “productive capital”, languish without clients and in one case – without approval.

For all the talk about pensions becoming an engine for economic regeneration, there is absolutely no sign in the Pension Regulator’s DB Funding Code that the agenda of the last two decades is going to change.  Small and medium companies, looking for equity funding , will not find the money coming their way from pension funds. The great innovative projects that can ensure a sustainable, healthy and prosperous tomorrow, are shunned because pension schemes need the liquidity demanded by insurers buying them out.

Instead it is DC funds, where the liability for things going wrong , rests entirely with the saver, are now actively encouraged to take on risk. The small exposure that the tax-payer has to funded pensions (LGPS and a few other public sector schemes) is an important exception that proves the rule.

Pensions or growth – or both?

It seems that we cannot have pensions paid from growth assets and we cannot have growth assets paying pensions.  The argument that those in later years must be ring-fenced from youngsters has led to DB pensions for the few getting funded at five times the rate of DC pots for the many. And yet there are still those who moan that CDC schemes where risks are shared over generations are unfair on the young.

The draw-bridge has been pulled up by those in DB pensions who are now busy “accelerating the end-game”. The cost of the end-game is being born by the young in two ways, first (and parochially) in low DC pension contributions and secondly (and generally) by the lack of investment in the development of sponsors and the availability of investment from the pension funds that UK PLC created.

There are ways to share risk, CDC is an answer that could still be adopted by large DB schemes looking to share risks, invest more productively and better manage funding costs.

CDC is also the way to convert DC pension pots to CDC style scheme pensions.

What is needed, is an enlightened pensions policy that can be adopted as part of Britain’s economic regeneration. As well as being the year when we pick over the wreckage of LDI, 2023 is also the year when the manifestos of the future Government, are established in advance of a 2024 General Election. Right now, we should call on politicians to question the DWP’s Pension Funding Regulations and  reassess the binary choice of pension or growth. We can provide welfare in this country without impairing the growth of its gdp.


About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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5 Responses to Pensions or growth? Or both?

  1. John Mather says:

    So LDI a cost remains a secret….not a good start to defining the solution when the quantum of the issue is unknown

    • Byron McKeeby says:

      Managers seeking the cost of everything and the value of nothing comes to mind with these repeated comments about the “cost” of LDI.

      Unless you attempt to measure/estimate its net value (which may or may not be negative) over the longer term, since 2004, say, then I’m really not sure how it helps us, whether it was an estimated £500m from January 2022 or some other estimated number.

      • jnamdoc says:

        Even if one could somehow deduce that LDI has provided some net value to schemes (at a point in time), it doesn’t solve for the underlying issue, the bigger picture that Henry is pointing to – i.e. even if all schemes were to be ‘successfully’ loaded up on LDI, without future growth (of the GDP type) then the UK Govt will not be able to service the resulting gilt laden schemes, and then we would really see what happens when the tide goes out….

      • henry tapper says:

        I think the view is that LDI lost UK pension schemes £500m. That is not a soon to be recovered amount – that is money that has simply gone missing! LDI is costly and its trading cost

  2. Jnamdoc says:

    Super article and summary getting to the hub of UK pension debacle.

    The flawed remit and myopic application by the TPR has over c20years ‘protected’ DB schemes by closing and eliminating them. If not corrected and re-set, because of the sheer scale of the DB pensions, that flawed remit will (continue to) drag down the broader economy too. As was once the case, employers should be taxed on these super-surpluses unless they are invested back into growth assets.

    We need a total intellectual rethink on how to encourage (rather than eliminate) pension investment and re-invigorate DB provision, with broader risk-sharing across sectors and properly engaging with the PPF as an insurer, and encouraging investment and innovation led solutions. Think of the collective effect of [5000] DB schemes investing for the future. I can immediately hear the consultant class screaming that schemes will not know that to do (‘without us’) – we’ll you know what, until the regulations created and criminalised employer / scheme conflict, UK Schemes were managed through an eclectic and powerful balance of employee reps and business people that had created a funded DB pension system that was once the envy of the World.

    Less regulation, incentivise investment, and tax the hoarding of surpluses on non-productive capital.

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