2023 was a shitty year to be an investment banker. As one such told the FT over the Christmas period.

“There is no stability, no investment, no growth in most banks — and there are likely to be more job cuts,”

This despite high interest rates reviving the fortunes of bank lending, it seems that there is little appetite for deals. I think this is unlikely. In the world I live in there is a huge amount of capital often linked to organisations desperately in need of finance. I see many pension funds , shorn of their capital, needing re-financing and finding sponsors unwilling or unable to find fresh capital. I find millions of savers who have pots but no guarantees to pensions, guarantees that could be provided by pension capital.

In short, one of the biggest sources of capital – is also one of the neediest of the money that banks have recourse to. If the capitalist system is to evolve, it should recognise that pension schemes need to be better integrated into banking than heretonow.

I say this, recognising that the PRA and BOE regard pensions as an explosive liability that in 2022 came close to bringing down one of the principal capital markets through irresponsible borrowing. It still seems scarcely credible that the principal actors in this – trustees, regulators and fund managers, could use LDI as a source of secondary banking , fail to de-finance when the market opportunity disappears and are now being hailed heroes as their asset-denuded schemes limp into solvency.

But so it is, and for so long as rates stay higher, they can queue up to hand in their jobs to insurers who enjoy the privileges of a buyer’s market. But this is not a rant against de-risking, it is a short blog about an alternative way of managing pensions which interacts with investment banking with the emphasis on long-term investment.

It’s been said before, but it’s worth saying again, that the debate about productive finance is linked to pensions by the alignment of long-term capital to long-term liabilities. Companies that run pension schemes can choose either to pay a 20% premium – sometimes running into billions of pounds and have an insurance company take their pension scheme off their hands, or they can choose to run the pension scheme on. If they choose to run on, they may need financial assistance from the banks, they may seek to consolidate through superfunds who themselves derive capital from the banks.

Some companies are weak and have such strong pension schemes that they may seek financing from the pension scheme itself, through the unlocking of surplus.  They can choose whether to lose the surplus to pay for buy-out or use the surplus to become productive again, relying on external finance to tide the scheme over till it can be run off via a third party superfund or returns to the company’s full sponsorship.

And what goes for companies, goes for savers who have been kicked out of pension schemes into retirement savings plans and now have a legitimate expectation that the pension they have saved for in the workplace can be offered them. They have been given the reasonably expectation that no matter how efficient the annuity market, they will not have to pay the 20% premium to buy a guaranteed insurance product but be paid a pension by a pension scheme.

I strongly believe that pension schemes who chose to take DC money by way of a “reverse transfer” should be allowed to do so, to make pension promises on a more efficient basis than insurers.  This is simply following the logic of the Pension Regulator as it encourages a market for capital backed journey plans and superfunds.

The missing element in this is of course the capital that most pension schemes cannot set aside to pay more pensions. That capital is however available through various sources – all of which ultimately revert to the banking system.

We should listen to the investment banks as they figure out what has happened to their customers and we should work out whether we as company executives, trustees or savers want capital backed pension promises that are supported by the finance from the capital markets. This is not a Faustian pact, it is the basis of capitalism. This was the conversation that was had that enabled the infrastructure of this company to be developed in the 19th and 20th centuries. In the 21st century we have the advantage of £2.5 trillion  in our pension system, most of which is invested abroad or relatively unproductively in the UK.

Linking investment banking and pensions failed when the aim was to de-risk pensions, but this time the Mansion House reforms are looking not at de-risking but risk sharing. The Treasury has said it no longer wants our regulators to oversee the quietest graveyards but to ensure that regulation is encouraging productive investment in the UK economy.

Pensions can finance a regeneration of the British economy and thus our social economy. Healthy growth leads on to confidence in public finances that puts money back into schools, health and social amenities. It encourages further improvements in pensions and benefits from the State. It means that pension schemes stay open , offering the opportunity for more people to join them and get paid pensions either from future accrual or from exchanging pots for pensions.

This need not be at the expense of insurance. Insurance has limited capacity and is suffering indigestion. It can be as a balance to insurance – which provides a counterweight in a balanced financial system. Let’s hope that many of the banks, busy considering laying off their staff, consider alternatives to the old de-risking model and align themselves with the growing number of  far-sighted people who see pension finance as the way forwards. They should set aside their plans for contraction and look for expansion in a partnership for the long-term funding of pensions,