The market–based regulation of pensions is a source of risk and deficits
My evidence to the DWP Green Paper consultation on Defined Benefit pensions
May 14, 2017
The ongoing crisis in occupational pensions, that is a result of the closure of many
company superannuation schemes, and their replacement with inferior alternatives, is a
ticking time bomb for society. Millions of workers will, in years to come, face a choice
between retirement with inadequate income and continuing to work into old age.
However it is not clear that there is anything fundamentally wrong with defined benefit pension schemes. A common complaint that one sometimes hears from experienced trustees and finance managers is that a pension scheme that appeared ostensibly to have been in good shape was closed on actuarial advice, after having been shown to be in technical deficit.
I wish to argue in this paper that a major contributor to such deficits are biases inherent in the approach and methods used by actuaries and accountants, based on recent developments in finance theory that are not empirically well founded. The regulatory rules themselves - that are supposed to protect agaist bad outcomes - are actually leading to those very outcomes.