I have a new commentator on my blog but he tells a familiar story. It’s a Michael Burry Story
Big-Short 2 – the sequel. Never have so many been put in debt by so few.
We will I’m sure (and in just a few years time) look back on this period and see it for the greatest slight of hand in the history of financial economics, and delivering the last nail in the coffin in what in Sir John Kay identified as the “biggest avoidable policy disaster in British politics”. And truly, it is.
The problem is not that the ABI is powerful (it is, and it is only doing its job to promote the profits of its members – the large insurers), but rather its that the DWP (full of well intended civil servants) lacked meaningful ministerial direction for the first 25 years of this century that is the problem (17 office holders since 2000, noting also the down-grading of the role by Teressa May in 2016 – what timing!). Civil servants, by nature, fear failure more than they’d rejoice in opportunity, and the insurers cleverly created a whole lexicon around that fear, promising to eliminate the bogeyman of “risk” and doing so by banishing those wild horses of Investment and Opportunity.
But hope, perhaps at last we have a Minister who fully grasps the issues? It’s also becoming clearer that the TPR gets it too – i.e. who’s looking out for what’s in all of this for the members – those working people who’s accumulated toil and contributions created the £1trn of DB schemes.
Its truly bizarre – indeed it feels like we’re re-enacting a UK version of the Big Short – as £50bn p.a. of members’ pension savings, accumulated over 40 years, is gleefully handed over bag-fulls to a small handful of mega-insurers, increasingly foreign owned and protected (we do hope) under the blazing Bermuda sun, while mysteriously (under our noses) stripping the UK economy of its growth capital.
The informed understand that each tranche of £50bn (of accumulated members’ interest) is expected to deliver c£10bn (low risk) profit to insurers over the life of the ‘contract’, and it seems without a jot of a concern for improving the lot of the poor members!?
And to be clear, all but a morsel of that capital at play essentially comes from the ceding schemes – e.g. L&G’s half year accounts the other week show clearly the paucity (c1%) of ‘capital’ that the insurers actually bring to the table (to be fair to L&G at least we can see that as one of the few insurers that still publishes accounts as Plcs).
While we scurry around looking to others – be it Australia, or now Canada – for a guiding way forward, remember the UK entered the 2000s rightly admired as having one of the best systems in the world! It was a 12 million member mass “mutualisation” arrangement, and it was as close as any nation got to a wide stakeholder community – underpinned by employers, the 12 million members pensions saving were invested in the economy, and it was they who shared in the profits and gains through their secure pensions.
Employer’s and members created these schemes – surely we must find a better way, one where we can allow the members to continue to share in the expected upsides (and downsides) – that’s the concept of mutualisation. Each £10bn profit being shovelled to insurers would provide an awful lot of inflation protection and much needed pension uplifts for those that actually created the value in the first place.
From the mood music on Pension Schemes Bill 2025, I think members can expect more from their Pension Minister and regulators, and I hope they can find the will to make it happen, and before its too late…
It is worse than a big short. The money is knowingly going into the land of the big short without anyone but a sparse few calling it out.
The DB system persistently re-investing into the FTSE guaranteed a wall of money tosupport British industry which would generate the profits that pay the pensions
That wall of money not only provided the dividends, it also invested in the communities to help pay for further education, healthcare etc etc.
Now that it is no longer a UK investment wall the co.panies find themselves being stripped of their wealth to remunerate short term money which largely goes overseas and now wirhout that money spent into the UK economy, we taxpayers are being told to pay more tax to cover theshortahe of corporate funding brought on by the termination of UK DB schemes, the loss of a big capital base, the loss of London’s major dominance of financial markets….
Not a good place to then remove pension schemes from Govt long term borrowing support…
My glass is half full. The secular change in the last 30 years is private sector DB to DC. DB is now over and the sponsors have derisked and got on with the business of flying planes (BA) rather than running hedge funds. The clock isn’t going to turn back and the runoff will sensibly be managed by insurance capital underwriting the longevity risk. U.K. business is now liberated into making widgets or flying planes not running an annuity risk portfolio.
It’s DC where our focus must be – making sure that we have billions of capital invested by citizens who know they are taking some risk by investing in equities but who do so none the less. Should our economy ever grow again then we should be seeking to raise the levels of saving and ensuring that pensions once again provide investment capital but without the damage that U.K. corporates faced in having to pay for the demographic changes which hit their pensions promises.
It does leave public sector DB untouched. That’s a whole other story – a liability which governments will need to tackle as public spending grows to levels where taxation becomes punitive. A topic for another day.
And what of retirement income Peter? Are you decrying the nonguaranteed pensions provided by CDC?
I’m not a supporter of CDC – I don’t believe it is a product which will catch on because of the way it’s configured to be worth more to older workers.
But regular DC is a source of equity capital which makes much more economic sense than companies swapping each other’s equity which was at the core of traditional employer-sponsored DB.
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