My friend Derek Benstead – a medicine for my recovery
Robert Shrimsley follows on from an article by Mary McDonald which explores how pension schemes could invest in UK defence (rather than let the Treasury cupboard run empty).
If the re-arming of Britain is truly the mission it should be, Labour will be forced to address which priorities to downgrade. Is it the net zero decarbonisation targets, which already face significant political backlash? Which clean energy investments will be diverted? Supporters will argue that achieving energy independence is now even more urgent but the already stretching 2030 target is likely to slip further.Which infrastructure projects will wither for lack of funds? What about those new towns envisaged by deputy prime minister Angela Rayner? Which public services will be further cut or see improvements delayed? The UK must also look at its own resilience planning and perhaps the subsidy processes that allowed it to lose an AstraZeneca vaccine plant. Labour needs to start this conversation with both itself and the country.There is still too much business as usual; too much wishing and deflecting. Preparing for a world without US security guarantees is now a primary mission and British politics must catch up with the implications of that reality.
You can read the article by Mary (in part) on my blog, my “shares” are run out , so much interest are the Pension Minister’s utterances getting. The Minister did infact do two speeches on Wednesday morning. The first was at Eversheds and the second at the Mansion House, Eversheds were involved in both – phew!
I managed not to be invited to both and to be thrown out of one , accused of being “press”! Make your own mind up.
An experienced and (by me) respected, mentioned that at last we have a view of pensions that isn’t dominated by “de-risking” our diminishing capacity to make a difference. To me “de-risking” has become an aspiration to be irrelevant. I wasn’t entering financial services in 1983 to be an irrelevance, I hoped that selling insurance would lead to me getting a proper job doing good things for my fellow man (and woman), right now I’d phrase the genders differently!
The point is that Britain is, after screwing up its economy by getting pensions wrong for a quarter of a century, got hit in the chest by COVID. We are now discovering that we haven’t got the money to reflate our defence budget and grow the economy without getting money out of pension savings.
In my view, “pensions” don’t stop when you retire, that’s when they start paying back after a career of saving. But we’ve created a vision around the small-minded views of a few accountants who have tried to shut me and a few others up.
Now we need to return pensions to what it was meant to be. Here is my favorite diagram, created for me by Derek Benstead when I had to speak to a huge theatre full of Cambridge lecturers about the need for USS not to become a DC plan.
I love the asterisk, we are doing nothing different with CDC than DB, other than reserving against risks we can’t consider.
We have a Pension Protection Fund that is insuring those risks and I am not quite sure how many insurances we are using to keep people safe. CDC doesn’t get PPF, DB does. CDC uses all its money to invest, DB insures too many ways. DC offers savers no insurance but glidepath – how pathetic is that!
If the Government wants to do something sensible with pensions, it should stop this over-insurance for pensions and under-pensioning for savings. We should move to a pension system where we invest in the UK to make UK powerful enough to meet our expectations of later life’s finances. That – as far as it’s been explained , is the Evershed fiduciary argument.
2025 means putting mandation on investing in UK growth. It means a new way of looking at pension investment with growth rather than de-risking turned up on the fiduciary dial.
We may need a pension tariff – exchange controls to stop almost all our capital investing overseas; we must get tough. This is a time of war and this is a call for pensions to go to war and get things done. We must get Great again.
At the Natwest Cushion event at the Mansion House, it was stated that the new Eversheds’ legal opinion stated that ” … fiduciary duty can extend to include opting for investments on the basis that there is a tangible casual link between investments and their ability to improve members’ standard of living in retirement”.
– Does national defence spending not have the ability to improve members’ standard of living in retirement?
– Which investments do not have the ability to improve members standard of living in retirement?
In my opinion the discussion about Trustees’ fiduciary duties was always an entirely an artificial academic discussion by lawyers interested in interjecting their role into trustee decision making. I doubt that any investment decision made by a trustee board following a reasonable selection process could ever be regarded as sufficiently “perverse” to be declared void by the Courts.
—- except perhaps hedged LDI in a market with negative real yields?
But a mooted deluge of legal claims expected by some industry commentators after the 2022 crisis has not materialised.
It seems potential claims to be brought against advisers and/or trustees or brought by trustees and/or employers relating to the LDI crisis could face practical difficulties in establishing elements of a claim (breach of duty, causation, loss).
IPE reported that Pinsent Masons were advising on a claim for LDI losses against an investment consultant and asset manager but there have been no further details thus far.
I agree Pension Oldie – Shakespeare’s Jack Cade was right! Henry VI
“casual” link or “causal”?
Auto-correct strikes again – should be causal, but perhaps this was an AI intervention!
I am getting emails from eminent lawyers that prove your point, This is dancing on a pin for benefit of the legal profession. Shakespeare had a good attitude to lawyers.
But trustees still need to follow developments from
Cowan v Scargill through Harries v The Church Commissioners for England and beyond.
As for the ochlocratic Jack Cade, he came to a sticky end…
Back in the states, way, way back in October 1978, Professor Harry Graham was the instructor for my MLR 601 Labor Markets class in my MBA program. We had a very brief discussion of employee ownership (ESOPs). That prompted me to ask Professor Graham: “whether pensions would someday favor social investing”. I wondered whether the plan should invest with the employees’ pecuniary interests in mind (as owners, employees, community residents, and/or US citizens).
He responded: “No”.
To the surprise of no one in the class, I bit: “Why not?” He responded: “Because the amounts at issue would never be substantial.”
In 1978, America had 443,000 retirement plans (including a handful of ESOPs) subject to ERISA (private sector pension law in effect since 1974). There were no 401k plans – the dominant DC plan today. There were 52 MM participants and $377B in assets.
Today, there are over 800,000 plans, with 140+MM participants (some participate in more than one plan), with well in excess of $12 Trillion in assets.
In the states, fiduciary duty requires managing the plan prudently, diversifying plan investments to minimize the risk of large losses, and acting solely in the best interest of participants and beneficiaries for the EXCLUSIVE purpose of providing benefits and paying expenses.
America’s ongoing debate over ESG and whether/how ERISA fiduciary duties apply to Individual Retirement Accounts continues today.
While the amounts at issue are now substantial, no one here expects the basic rules of ERISA fiduciary duties will change anytime soon.
In The Pension Fund Revolution, originally published in 1976 under the title The Unseen Revolution: How Pension Fund Socialism Came To America, a leading management philosopher Peter Drucker reported that institutional investors, especially pension funds, had become the controlling owners of America’s large companies, the country’s only capitalists, he argued.
Drucker maintained that the shift began much earlier in 1952 with the establishment of the first modern pension fund by General Motors.
By 1960 it had become so obvious to some that a group of young men decided to found a stock exchange firm catering exclusively to these new pensions investors.
Ten years later that firm (Donaldson, Lufkin & Jenrette) became the most successful, and one of the biggest, Wall Street firms. (The firm later disappeared into Credit Suisse in the year 2000.)
Drucker’s main argument, that through pension funds ownership of the means of production had become socialised without becoming nationalised, was unacceptable to conventional wisdom in the 1970s.
Even less acceptable was the second theme of his book: the aging of America.
Among the predictions made by Drucker in his updated The Pension Fund Revolution were: that a major health care issue would be longevity; that pensions and social security would be central to the American economy and society; that the retirement age would have to be extended; and that altogether American politics would increasingly be dominated by middle-class issues and the values of elderly people.
While readers of the original edition found these conclusions hard to accept, some of Drucker’s arguments have proven to be prescient.
In a new epilogue written in 1995, Drucker (who died in 2005) discussed how the increasing dominance of pension funds represented, in his view, one of the most startling power shifts in economic history.
The Pension Fund Revolution is considered by some (eg Canada’s Keith Ambachtsheer) a classic text regarding the effects of pension fund ownership on the governance of the American corporation and on the structure of the American economy.
It provided at the time a wealth of information for sociologists, economists, and political theorists, even if some of Drucker’s hopes and fears have not been fully realised.
Thanks. I agree. Old folks like me are a dominant political force – one reason why President Bush II approved Medicare Part D, President Obama approved the expansion of Medicaid, and President Biden added the misnamed Social Security
Fairness Act – none included any new revenues/funding – all those improved entitlements benefit retirees while worsening our annual budget deficits.
However, American workers typically have no say in how a defined benefit pension plan assets are invested.
Further, most DC plan participants have no clue regarding their investments, especially the ever-increasing percentage of auto-enrolled participants who remain in the Qualified Default Investment Alternative (typically a target date fund).
If you asked the next 1,000 American participants to confirm their asset allocation (excluding those invested in a single alternative), maybe 5, probably fewer would know.