We cannot be world beating unless we take financial risk with our capital

Martin Woolf, begins his latest opinion piece in the FT

As a result of a series of narrow, short-sighted and overly theoretical decisions, the UK has ended up with a pensions system that is incapable of generating the supply of long-term risk capital on which development depends or of providing the population as a whole (not just a few favoured groups) with adequate and secure pensions. Symptoms of this disaster include a moribund stock market, under-invested companies, an undue dependence of foreign capital and even a stagnant economy.

Woolf calls on the Government , pensions industry and Country to wake up to the message of the Tony Blair Institute’s report (covered on this blog at length)

Myopic decision-making has led the UK into a pension cul de sac. It is time to exit and so to think big and act boldly.

My latest blog  suggests that the Government may yet pull a rabbit out of this hat. I don’t know how but it could start by thinking about fiscal incentives for pension schemes to invest in real assets and not to invest in gilts.

If pension schemes have determined they will sell up and transfer assets and liabilities to insurers then they don’t need further incentives than the benefit to their balance sheet.

Schemes that choose to stay open or reopen and invest in productive capital should be rewarded for doing so. All is not lost in DB land until the fat insurer sings.

Government could also offer incentives for open DB plans to swap expensive guarantees on indexation for the promise of  increases – created on a formulaic rather than discretionary basis, when investment targets are met.

Risk-sharing – where the risk of success is shared by the member with other members has been in operation since we started using pooled funds, but pooling longevity, as insurers do with annuities, has not been a feature of DC schemes heretonow. We should put that right so that people with pots, can have pensions done for them without fear of money running out.

Woolf talks about CDC but in macroeconomic terms.

Meanwhile, the country has moved from one corner solution, in which all the risk fell on scheme sponsors, to another in which it falls on individual contributors. The sensible alternative, however, is in the middle — collective defined contribution schemes: eternal funds that promise pensions based on actual long-term returns. This arrangement would share risks across individuals and generations and takes advantage of the economies of scale available to large long-term investors able to bear risks others cannot.

In practice, CDC cannot happen without leadership ,it needs  the likes of the CWU to force if through. CDC is not going to happen in the UK unless people are bold enough to stand up to the nay-sayers and do it. The DWP and FCA are keen to talk about how CDC can become something that savers can join. But in truth, the Government has done precious little to encourage another Royal Mail, let alone make CDC something that anyone could join.

Woolf is clear that DC is not the place you’d start if you wanted to get UK pensions invested in UK growth, he’s right there, we need to organise pensions like organising labour – collectively. In micro-terms, that means designing investment solutions, pricing, pension underwriting and scheme and plan rules so CDC can become the replacement of the annuity as our default way of getting paid by our pot.

The “superfund”

People are right to be confused about the use of the word “superfund” within pensions. To date it has referred to a DB pension consolidation vehicle proposed by Edmund Truell. recently the Tony Blair Institute , City of London mayor Nicholas Lyons , the Treasury and the shadow Chancellor, have all expressed interest in seeding a national fund with money from Nest and PPF to allow large DC funds to get access to UK growth.

Coincidentally , this is what Pension Superfund (the Truell version) has been aiming to do for the past five years.

If these superfunds were investable as investment trusts, LTAFs or pooled funds, the idea is that DC Trustees would lose their misgivings about investing in private markets. Implicit in this idea is that the Government would be sharing some of the risk.

Government as a risk-taker

The sad truth is that over the past twenty five years we have moved our pension system away from taking risk  and towards risk free investing in bonds and low-risk investing into global equity trackers.

An example of how Government has been presenting private sector pension regulation

This has not just been tolerated by Government, it has been encouraged. Whether you are engaging with the Pensions Regulator as a DB or DC scheme – or as a consolidator, you will be aware that TPR is a risk-based regulator which looks at risk with suspicion.

This distrust of risk has to change. If we want an enterprise culture- we need to deploy our capital productively and that means that the Government has a duty to encourage risk-taking.

In the past twenty five years, it has failed to do this and we are left with a much diminished pension system as a result.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
This entry was posted in pensions and tagged , , . Bookmark the permalink.

2 Responses to We cannot be world beating unless we take financial risk with our capital

  1. John Mather says:

    The establishment will continue to delay the dashboard as it would identify the reality of what income the average pot produces.

    It would also identify the liability and/or the tax cost of providing the pensions of unfunded DB promises. It seems clear that the turkeys have found a way to avoid the vote by differing Christmas

    Follow the money to understand motive. See article are the numbers correct?


    “the average UK pension pot is £37,600”

  2. jnamdoc says:

    Agreed with all of this.

    We also need to stop using the word “risk” (its too pejorative). It’s an actuarial term, not one of investment, growth or sharing. Govt doesn’t say it is going to “risk” £xbn on the NHS or educations – these things are all investments in our future. So too for investment in growth, enterprise, infrastructure and innovation. They are the vital lifeblood we all need to pay for our services, and our old age.

    Pensions, most simply, are but a prioritised hypothecation of economic output. That prioritisation has however allowed to become such an all consuming means to its own end, that it it has become a colossal dead weight around the economy.

    The current regulatory approach actively encourages dis-investment, transferring huge swaths of hitherto private pension investment into gilts. The regulatory regime, like any well functioning economy, needs proper balance. It’s macro-economic suicide to dis-invest on such a scale. Schemes are and should be an integral part of a well functioning economy, and its self-serving and pious to claim otherwise.

Leave a Reply