October 21, 2013

Not the pensions industry’s fault, your Royal Highness . . . .

The Prince said that “the current focus on “quarterly capitalism” is becoming increasingly unfit for purpose”, and urged pension funds to take a long-term view of “pension fund liabilities that are stretching out for many decades”.

There are two problems with this point of view. The first is that the Government, in its wisdom, sees pension fund liabilities as immediate debts, rather than long-term cash flows. The legislation effectively requires pension funds to rise in value as quickly as possible, and the pension funds are finding that “liability-driven” investment (that is, largely in gilts and bonds) gives tiny returns. Pension funds are forced to adopt “quarterly capitalism” to produce the fund levels required by the legislation.

The second problem is that the Prince of Wales’ speech urged pension funds to invest in “the maintenance of vital ecosystem services”. However laudable such investment would be, it would undoubtedly produce low financial returns – probably barely beating price inflation. It is difficult enough as it is to persuade pension funds to invest in big infrastructure projects like the HS2 rail line or new nuclear power stations. If you restrict the field further, to “vital ecosystem services”, well . . . .

What pensioners need is a plentiful supply of money that will not run out. If your pension fund can provide a net return of 6% per year, it will have doubled in 13 years and trebled in 20 years. But if you can get a 9% return, it doubles in 9 years, trebles in 14 and quadruples in 18. Can you blame pension fund managers for aiming at a higher return? That is what the pensioners actually need to pay for their long-term care.

If you have any comments on this blog please contact Roger May on 020 7583 2222 or [email protected]

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