My friend Peter Tompkins is an actuary of some renown but his position is not my position. He is firmly in the camp of the insurers taking on the risk of defined benefit pensions , specifically replacing corporate promises with insurance guarantees.
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.
There are contradictions here, around the potential “ponzi” of a public unfunded pension system for our publicly paid employees. I am sure that Peter has a view on the secular shift and what it means for future public pension promises.
We are entitled to our differences on who should take the risk, should it be shareholders, tax-payers or savers? Is is about personal responsibility or is it about efficiency? I can see how Peter and I can stay friends but have such big differences.
But where I struggle to accept the philosophy of Thatcherite self-responsibility is with regards self-sufficiency in financial planning which I see as deficient in all areas of society. There are those like Peter Tompkins who are well organised and manage their affairs properly and there are those like me who need defaults to make sure I do not run out.
Whether we decide to take control of our affairs and opt-out of DB, retirement income from DC funds (probably deferred annuity) or another non guaranteed pension (CDC or derivative of CDC) or we accept the default is based on there being a collective default we choose not to take up. Nest may not be collective but it is doing itself to offer its decumulation default as a collective pension.
My worry is that the insurance industry wishes to take over all the defaults and ensure that the alternative is “wealth management” leaving no scope for people to enjoy the very real advantages of “best endeavour” pension schemes which do what he admires in DC – invest in the economy and ownership of our real assets.
Peter would have this in DC, by which I think he means wealth management but he sees no space for pensions paid from an optimistic view of investment, he sees annuities as the only way for income in retirement to be offered (he ducks the issue of unfunded public sector pensions and by extension the state pension).
His characterisation of the efforts of pension schemes as amateur hedge funds has some validity, the hedging led us to the disaster of September 2022 where hedging wiped a third off the value of our corporate DB pensions. But that was not the fault of the pension system, it was the fault of those who were trying to de-risk it. It has opened the door for insurers to take over. He can point to a failure of DB resulting from a failure to benefit from risks available to those investing over the long term.
This de-risking of our DB system in the first quarter of this century has cost companies the capital they have needed to compete globally. We are to believe this is “secular change”, I call it the extinction of “secular enlightenment”.
Consequent to the wreck that de-risking has done to our DB system, Peter’s mind-shift denies individuals pensions based on the returns from our and global economic growth and sides (like GAD with its shrinking confidence in GDP rising) with those who see our economy grinding to a halt.
I find this view mind-dumbingly negative and so lacking in a wish to embrace risk as to go against the success of capitalism over the last 300 years. Maybe that is what he really refers to in his phrase “the secular change“.