John Kay
Thanks to everyone who is reading my blogs (even those I insult). I had some feedback from one former pension minister which pointed out that I was rather more dismissive than I should have been. She was right, the blog has been changed – apologies given.
My job is not to make people sad but to give them optimism. Thanks to Dennis Leach for his excellent contribution, the work of John Kay on where we went wrong with pensions.
Here is the link to the important article by John Kay
https://t.co/vUfz0XtzAs Subject of this morning’s blog – a virtuoso essay by John Kay
— Henry Tapper (@henryhtapper) January 16, 2025
What is needed is not just intellectual rigour: we also need to understand (as John Kay’s article makes crystal clear) that today’s mainstream economics has forgotten what we once knew to be true – much of which we learned from John Maynard Keynes in the the 1930s.
Mainstream economics has become blinded to empirical truth about how the economy works in the real world by its obsessive need to cast all its thinking in terms of mathematical rigour. It leads it to focus on a narrative that focuses exclusively on the supply side as if the economy were a household; this is particularly true of Johnson’s IFS.
Thanks too to “Jnamdoc”
Very good news re Torsten Bell. There can be no excuses that they (Govt) don’t understand the issue or the solutions.
Having “de-risked” away £1trn of DB assets by disinvesting, it can be no surprise we have a massively under invested economy, zero growth and unacceptably low productivity.
The solutions?
Sir John Kay’s Dec 2013 paper calling out “the collapse of private sector defined benefit pensions may constitute the most serious avoidable policy disaster in Britain this century” needs careful and serious consideration by Policy makers. The paper got little initial airtime, with the powerful lobbies that influence govt demoting it as it was not in tune.
Before we double down, compounding on this truly catastrophic policy disaster, we need to pause….
and ask ourselves one question – what is the role and purpose of insurance?We should consider that on first principles, then on its role more broadly within the society/economy, and then in relation to the provision of pensions for working people?
The answer, quite simply is that the purpose is to cover the tail risk that individuals or organisations cannot accept or manage on their own. Insurers should do that by aggregation, scale, diversification (against the risk) and the use of (a longer) term. That is a very important role to provide to society. So important that we have designed powerful regulations to limit the risks that insurers can take. De-risking is the language (quite rightly) of the insurers: we need our Policy makers to go back to first principles and not be swayed by the powerful lobby language of endgame/de-risking/gold standard etc.
Phase 2 of this avoidable policy disaster is the ongoing transition of a £trn or so of investment capital by DB schemes to insurers, effectively giving them the keys (no, actually, the engine) to the economy. It’s not their purpose. It’s a bit like tasking the makers of Chieftain tanks to compete in Formula 1.
The solutions to all this are straight forward (not the same as ‘easy’) and we’ve covered that in other blogs. If we don’t change track, we might just ‘de-risk’ ourselves out of existence.
We have had enough wealth creation for the top earners and too little private insurance for those who want a market based pension. Speaking yesterday morning with Derek Benstead, I understood why he called pensions proper insurance. Pensions provide certainty to those who have the optimism that investment targets can be reached, that sponsors will stand behind promises made and that the market in the long term will deliver without the assistance of a Government safety blanket.
I have mentioned a few names and some of my contributors now sound like they feel part of an enterprise. I hope John Kay is feeling better, we desire his return. For now we have his 2023 contribution which I hope our new Pension Minister has absorbed.
A proud moment for the blogger – the Pension Plowman listening to Kay – let’s hope the Government does!
A timely reminder, Henry.
Lets hope the Government / Parliament now moves away from purely considering failure to what could become possible for the Nation in future pension provision!
Ironically, it is Paul Johnson’s IFS today which is singled out for criticism in the blog.
In 1979, Professor Kay became Research Director of the Institute for Fiscal Studies, which appears to have lost its way since?
A reminder of what Professor Kay said some years ago when he identified “four central myths” behind what he called the American business model.
The first was that greed is overwhelmingly the most important motivation in economic affairs. Of course, it is a motivation, but it is not overwhelming for most people. Most people work because they want to do a good job, because they enjoy the respect of their friends, and so on. If you ignore these other motivations, you actually undermine the relationships that make corporations effective.
False premise two was market fundamentalism. It said you should impose as few restrictions and limitations as possible in the operation of markets. But this doesn’t recognize that markets actually operate — and can only operate — through an elaborate social, political, and cultural context. While some of that may be government regulation, a lot of it is self-regulation — the ways people expect to behave. To suggest that unregulated markets are more efficient is wrong. Markets rely on rules and signals. Without these, you get chaos.
The third premise, which in a sense is obviously mistaken, was that a successful business needs a minimal state. This argued that the only legitimate role for the state was in the protection of property rights and the enforcement of contracts. But when you look at them closely, you find that successful market economies have the largest and most powerful governments the world has ever seen.
The fourth was that there’s an overriding need for low taxation, which is also untrue.