“The drag of pensions on productivity is too large to be ignored”

“Jnamdoc” is the pseudonym for one of Britain’s brightest pension managers. From time to time Jnamdoc contributes a comment that provides an insight that cuts through conventional thinking and can genuinely be thought – “thought leadership”.

This comment was made after reading my blog “The Mansion House reforms are the right thing to do” and I don’t want them mouldering in a backwater of this blog. They are important and should be read – PLEASE READ!

Pensions Experts?

Being able to fit a door, doesn’t mean I know how to build a house. So be it with LDI proponents. It should be a niche part of the solution. If you are the first mover you are the only person doing LDI. So when considered at a single scheme basis, a model can be constructed (if anyone properly understands duration adjusted approximate matching) that could be of some limited use. But when implemented on a whole system basis, and especially with leverage – it is not sustainable.

The Govt is at last awake to this, but it is in a bit of pickle here – it knows the model is broke, but can’t have schemes offloading Gilts of any scale (they need continued take up to “pay for vital public services”), and so it needs to promote some other ways to get of getting a toe back into investment-waters needed for our economy.

The scale of DB pensions and their impact, or the drag, they have on productivity is just too large to continue to be ignored. Something must be done, and the Mansion House Reforms are but an acknowledgement of that, they are are timid, but at least a step in the right direction. There is no way forward for an economy that invests predominately in its own Gilts. And make no mistake, when considered in aggregate the scale of DB pension funding is so colossal that it counts as an economy, certainly in terms of the impact it his on UKPLC.

We also seem to have lost the understanding of the difference between “money” (or our “pots”) and a pension.

Money is of a fixed value, a token we hold or receive with which to exchange for goods and services. A pension, properly constructed, should provide the age-restricted ex-workers with an income for life related to some share of the economy, and crucially is provided by those still working. If we do not have a growing economy, or too few workers, or too little economic output to pay the pensions (in money), then the pensions become worth less (a lot less). By overloading, on a whole system basis, the dependency of ever receiving a pension payment onto gilts (future taxation) on the colossal scale as witnessed, rather than into the productive part of the economy, we increase the likelihood that “the system” will not be able to afford to pay the pensions promised.

Look to history, globally, and think carefully about how that might end – an overburdened, overtaxed, underinvested, under capitalised renter worker-population, being expected to fund a Govt not for public services but to fund the gilts required to pay £1trn – £2trn of (formerly) private sector pensions. How do we think that will play out…?

The lack of commentary in support of the Mansion House Reforms may be because no-one has told “the industry” what to think in this new paradigm? The UK is blessed with some of the world’s most creative financiers and investors, but do not confuse them with “the industry” – that is the reserve of the actuaries and the lawyers, the ultimate rule makers and followers. They are getting there, slowly but surely, as by nature they are cautious and slow to change – rightly so, pensions are a serious and long term endeavour. And others in the industry while aware to the systemic risk they have created, continue with the same old song, hoping for a sufficient share of the current buy-in feeding frenzy, before sloping off into their leisure, golf club, or marina dotage.

Our DB pensions assets (private the state / local govt funded too) should have been considered as a National store of wealth, investing more in diversified pools of long term assets to pay our pensions, and as match for any of the worlds’ other +£1trn sovereign wealth funds (such as the Norwegian, or the Saudi’s). Better late than never, but the journey is going to be bumpy and the buffers will be tested.

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 drag of pensions on productivity is too large to be ignored”

  1. Allan Martin says:

    Thanks, an excellent challenge or two. I would only extend the funded pensions considerations by asking whether resource rich countries and other foreign return seekers will continue to buy gilts that might be perceived as being solely to maintain our standard of living.

    On the unfunded public sector pensions front, I again feel obliged to mention the £50bn+ of index linked pension promises (~gilts) made each year to our deserving NHS staff, teachers, police, firefighters, armed forces and civil servants. £2tn of liabilities has already accrued – promised from future taxation assuming GDP growth of ~CPI + 3% pa. The 30th March 2023 H M Treasury announcement of the reduced SCAPE discount rate (to CPI + 1.7%) effectively admits a ~£500bn past service shortfall. The 2020 actuarial valuation reports are awaited with interest, as are the 2021 Whole of Government Accounts.

    • byronmckeeby says:

      Allan, for once could you stick to the subject matter of the blog, please, and not seem always to use the Comment space to vent your spleen about unfunded public pensions and Scape discount rates as well?

      We know you care about these things, but it’s becoming a broken record from you.

      For example, what do you mean by “an excellent challenge or two”? You’ve asked another question about the appetite of overseas investors, but I’m no wiser as to how you respond to the challenges.

    • byronmckeeby says:

      And I’m sure if you ask Henry nicely he’ll give you a separate blog opportunity to expand on your concerns about unfunded public pensions.

  2. Allan Martin says:

    I had hoped the “(~gilts)” would be sufficient to invite consideration of the similarity between funded pension scheme gilt investments and unfunded public sector pension promises.

    • byronmckeeby says:

      Too obscure for me, Allan.

      As a mathematical symbol, a tilde means “approximately” but in logic it means “not.”

  3. Peter Wilson says:

    Much of the historical wealth of this country comes from the days of empire and was generated off the back of workers and resources outside of this country. If the DB pensions were to be considered a sovereign wealth fund then it would made sense for a lot of that to be invested outside of these shores, generating wealth elsewhere that’s then imported into this country. This is the case with most sovereign wealth funds. I don’t understand, from the perspective of the beneficiary of a pension fund or of the country, why the best option is to invest heavily in UKPLC. Sure, invest some in the UK, but given we already have labour shortages it would make much more sense to invest elsewhere.

  4. Dr Robin Rowles says:

    How the DB Pension’s funds are generated is, to a certain degree, a side issue. What is the main issue, which has largely been ignored especially where LDI was concerned, is can the fund continue to pay the pensions promise until such time as the last pensioner in receipt of that promise dies? The Fund does not exist to feed the ego of Actuaries or CFOs and the like, nor is it there to pay CEO’s salaries nor shareholders dividends (#bppensions…)! Anyone concerned with supporting DB Ppensions, such as our Government or Insurance Companies through buy-outs ot buy-ins MUST understand this. And, MUST support the Pensions Promise of the Scheme, not some fanciful idea of what YOU think it should be (have been)!

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