Many comments on my blog are so well argued that they should be published as blogs in their own right, rather than languish in the obscurity of the archive! Some comments go unpublished but all are welcome (other than the spam which wordpress effectively weeds out).
One comment in question is the this response to a recent blog of mine where I pointed out that herding into LDI was continuing as DB trustees pursued the “endgame” of buy-out. Here’s the comment from @Jnamdoc
If you have a comment you’d like published as a blog – please send it as a word document to henry@agewage.com
Insurers and industry types always see the answer as more insurers, industry or consolidation. The route cause of our current problems can be traced back to the 2003 reforms which formalized (for political reasons) that pension obligations became a legal liability of the employer, creating a separation between schemes and the sponsors. {Ultimately these reforms, with continual Regulatory zest – because they could – led to scope for criminalization of corporate actors if they could be adjudged (with hindsight) to have weakened (even inadvertently) the claims from that liability}.
Anyway, at a stroke CEOs /FD/ commercial directors (the leaders of industry and investment who hitherto had taken a keen interest in the pension scheme, bringing a mix of skills including an investment / entrepreneurial understanding) stepped off of Trustee boards, advised they had a conflict of interest. Boards were thus stripped off the commercialism needed to invest and thrive (or at least at the talent pipeline was switched off, static since, say, 2003, as there are some brilliantly capable trustees, but they tend be of a certain generation).
Once that gap had been created between schemes and sponsors and members, the consultants stepped in with their alignment to the insurers, and this started to infiltrate the Regulator bodies and thinking.
That was the root cause.
The effect of the above factors has as we all know been terminal for the ongoing provision of DB pensions for working people – and Insurers with a vested interest, have messaged that only they are capable of managing schemes, and hence the ever increasing calls for “consolidation” – that suits their business model, and has almost become the accepted wisdom.
It is not – it’s the route of the problem, because Insurers (naturally for them) see schemes as being in incubation, until they are sufficiently overfunded, at which point the insurers will pick them off. The notion that only insurers will be skilled enough to operate and pay pensions is misplaced and narrow minded– it tends to the ultimate Statist solution or one size fits all approach, the corollary to saying all business should be nationalised.
The manifestation of this incubation mindset has given rise to the language of “de-risking”. Insurers, naturally see the World in terms of risk elimination. They do not care nor are they interested nor understand “investment” (as Myners commented) – that is for others. Rather they look to eliminate risk, that is there raison d’être” – and if someone else is picking up the costs (members and sponsors) until they are ready for buy-out, then they will encourage Regulatory language to maximum de-risking and funding levels.
What we need is a change in the Regulatory Framework for DB pensions that re-connects employers and members with the Scheme, broadening the talent base, where the system should reward investment, through improved member outcomes, lower costs to sponsors, and broader support of the macro-economic impact.
The current system is underpinned by the false messaging that schemes are in decline and need rescued by consolidation. That is because we have starved them of talent, treating them as something to be prepared for transition to insurers. That system is designed to deliver schemes pregnant with surplus to cover the “insurers’ profit”.
There must be a fairer way to share and spend that surplus. By definition the surplus definitely exists – insurers will not ever take on scheme without a full life understanding of their profit, and that surplus is being taken from members and sponsors.
So, the current framework is undermined by a false premise – that separates employers and members from the Scheme, that only insurers (the one-size fits all de-riskers) can provide pensions, and hence all of the language is about consolidation and insurer buy-out. We all need to reconnect with collective pension investment and outcomes – roll on CDC, not consolidation.