Dear Lord, yes, ignorance is still ignorance

That sounds like good news, but don’t be deceived:

The combined deficit of FTSE 350 companies with final salary pensions schemes, which pay a guaranteed income for life, fell from £84bn at the end of December 2016 to £76bn at the end of December 2017, according to consultancy Mercer. The value of pension fund assets rose nearly 6 per cent to £781bn at the end of December 2017 because of strong markets for stocks, bonds and other assets.

To put it another way, this is just the measurement of a bubble. The real news was:

However, “liability values” — the amount required to pay retirement benefits — also increased by £36bn over the course of 2017 to £857bn, more than 4 per cent higher than a year previously.

Or, to again out it another way, thing are going to look one heck of a lot worse when the bubble bursts, as surely it will.

This takes me back, however, to the long term issue of pensions. First, let me reiterate that this deficit simply highlights a long term concern of mine, which is that the logic of mass pension saving represents one of the greatest examples of a fallacy of composition that there is. I explain why here. Because it is possible for an individual to save for their retirement does not mean that populations as a whole can.

Second, if this deficit is persistent and ongoing, and it is, whether or not the logic of pension saving is flawed or not there is the most massive fraud by false representation going on here.

If you were going to set up as an expert on the issue of pensions you would, we would at least hope, find out something about pensions first.

Specifically, about the funding of them.

Low interest rates make the assets in pensions funds rise, absolutely true. This will reverse when interest rates rise again, also true.

But, and it’s rather A GREAT BIG RED WAILING SIREN OF A BUT YOU SODDING IDIOT sorta but, low interest rates increase liability values by more than asset values increase. They will also fall by more than asset values when interest rates increase. For the technically minded this is because the liabilities last for longer than the typical life of the bond portfolio’s maturity.

Or, as we might put it, when the bubble bursts, then the problem solves itself in large part. Liabilities fall by more than assets do.

No, you don’t have to know that, no, he doesn’t either. But given that he has decided to tell us all how pensions should be run and funded THEN IT WOULD BE HELPFUL IF HE KNEW WHAT THE FUCK HE WAS TALKING ABOUT.

You know, maybe?

26 thoughts on “Dear Lord, yes, ignorance is still ignorance”

  1. You can’t expect Professors of Political Economy to ‘know’ stuff, you elitist neoliberal bully! Don’t you realise that all that matters is the feelz?

  2. Given that he wants to take these pensions and use them to build skoolz n ospitals n airports n stuff, why does he care?

  3. Genuine question from a relative ignoramus:
    I have a defined benefit pension from a previous FTSE employer. At age 60 they (or rather their pension fund) will owe me £x0,000 per year. Is that liability to me not fixed irrespective of interest rates? Trying to clarify how a rise in interest rates might reduce their liability to pay my pension?

  4. Doesn’t change their liability, no. Changes the accounting of how they will fund it. The difference is all over on their side of the wall, not your.

  5. Makes sense.
    I also remember a relative who works in the pensions advisory industry pointing out the key issue of timeframes. The liability only realises itself over the full lifetimes of the pensioners. An ‘underfunding’ is often only notional / temporary. It doesn’t have to be made good ASAP but only over a timeframe to enable assets and liabilities to match. Ie If current asset value is less than current liability it’s not necessarily doom and gloom. Be patient. Keep calm and carry on – as long as your employer is not a total spiv like Philip Green.

  6. The Spudmeister is not alone.
    Half the actuaries I (sadly have to) deal with think the same way!

  7. > The liability only realises itself over the full lifetimes of the pensioners.

    Unless the retiree requests to withdraw from the DB scheme and takes a Cash Equivalent Transfer Value. If I was working for a company which looked like it was circling the drain, I’d be looking for a quick exit.

  8. The Spudmeister is not alone.
    Half the actuaries I (sadly have to) deal with think the same way!

    I’d be amazed if there are actuaries who don’t realise that changing the underlying interest rate will change the value of future liabilities. But perhaps you were referring to a different part of Spud’s thinking?

  9. If I was working for a company which looked like it was circling the drain, I’d be looking for a quick exit.

    A company pension fund (pace Cap’n Bob) should not be invested in its own shares and should be just as well-funded after a company collapse as it was before.

    What can affect things is that (a) companies in (what they hope/perceive to be temporary) difficulties may underfund their pension schemes; and (b) pension schemes make assumptions about the rate of new entrants into the scheme – an abrupt halt may give rise to difficulties.

  10. @Patrick

    as long as your employer is not a total spiv like Philip Green

    …… which you mean…………?

  11. Patrick, it doesn’t change how much they’ll have to pay out to you over your life. But it does change the amount of money they should have put aside now to pay for it.

    If the pension fund were getting 7% p.a. on its investment in government bonds, it wouldn’t need as much money to fund your fixed future pension payouts than it would if it’s only getting 2%.

    Some of it’s a real problem (if they are invested in government bonds and the return has dropped), and some of it’s an accounting problem (some of the long-term estimates are based on government bond returns, whether or not that’s actually what the fund has invested in).

  12. What Richard says.

    If interests rates are 10% and the pension has to pay you £10,000 p.a., they need £100,000 to create that. If they have £100,000 in the bank they are fully funded.

    If interest rates fall to 2% they need £500,000 in the bank and now suddenly they are £400,000 short.

    It’s part of the reason for the BHS fiasco. If I were running the above pension fund and had put in £100,000 when interest rates were 10%, I’d feel a bit aggrieved if when, 10 years later, interest rates fell to 2% and the now underfunded pension fund was blamed on me.

  13. Andrew, I think you are right. I’d love to know what Ritchie’s pension arrangements are. Given his hatred for private pensions I think he must have done very badly.

  14. Bloke in North Dorset

    ISTR some time ago a post from Spud in which he showed a remarkable misunderstanding of /refusal to accept the concept of the time value of money. It was discussed on here at great length but I can’t find it.

    So this is no surprise.

  15. BiND – Spud is on the record as dismissing TVM because ‘they discount the value of future cash flows’ – perhaps conflating the common term that can mean ‘ignoring’ or ‘disregarding’ for the technical process of ‘applying a mathematical adjustment to.’ How a pudding-head like him became a CA is either a mystery, or a damning indictment of the ICAEW. Possibly both, I suppose

  16. If the Dick confined himself to telling us all only things he actually knew about, we’d be subject to endless bulletins on the length of his toenails.

  17. We can surmise all we like, but the reality is that he is a massive, weapons-grade cunt. A thoroughly despicable bastard of the highest order. A part of me hopes he gets vermine, but only so the world at large gets to see the vicious, poisonous bastard he really is.

  18. @lizardking

    Mostly agreed but the thought of the puffed up ego getting into the HoL is too nauseating to contemplate.

    His ego is coated with some sort of dense slime/rubber alloy. Criticism slides or bounces off, so even if his stupidity, moral cowardice and utter cuntishness were universally recognised, he wouldn’t accept it.

    I was watching a re-run of Downfall and seeing Hitler’s mad ravings of phantom armies saving Berlin and his blaming the entire German people for their destruction and that it was they who had let him down reminded me that such psychopathy as we think we see in Murphy really does exist.

    I truly hope his life ends up miserable and failed and that his last year’s are spent in his own lonely dank bunker.

  19. Stephanie Flanders ( where is she now ) once did a BBC web-site article saying public sector pensions could be kept as they were and the additional notional funding needed could come from hiring more public sector workers.

  20. Richie would solve that exodus problem with some sort of internal passporting system – he’d take your wealth as a punishment on exit or even simply ban people from moving.

    Simples. Problem solved.

  21. Or, as we might put it, when the bubble bursts, then the problem solves itself in large part. Liabilities fall by more than assets do.

    If the asset price bubble bursts because interest rates rise, then yes. If the the bubble bursts for other reasons? And if the response to that is the typical central bank idiocy of lowering rates even further? (As in 2007-2009, when FTSE almost halved and BoE interest rate went from 5.75% to 0.5%).

  22. Back when I was a Housing Association board member back in the noughties we had a special finance meeting where the issue was exactly as described above: interest rates are going down which means our pension fund isn’t going to be big enough, we have this ten-year plan to restructure it to ask the workforce to agree to.

    I asked the obvious question: what happens if people retire early before the pension fund has been built up. Oh, that would be wonderful, as their entitlement will be so much lower due to not having built up their contributions. It’s the people who will still be here in 15 years that’s the problem, but that won’t be a problem because in 15 years the pension fund will be big enough to support them.

    I was still getting the annual reports after I left and because they hadn’t ignored the early changes they were able to cling to the sleigh-ride down to 0.5%. Their current issue is governments threatening to steal their property assets and give them away. Y’know, the assets that they use to pay their mortgages with.

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