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Friday, 1 August 2014

Actuarial Armaggedon

The greatest destruction of value in the British economy over the past quarter-century has been the erasure of most of the value of the savings made by women and men through their pension funds. It has often been pointed out that fees charged to funds by fund managers have removed much of that value; but it is trivial compared to the purblind misguidance given by the self-styled Actuarial Profession, with the cynical collusion of accountants.

Every pension fund must have a named Scheme Actuary, who has huge influence over the decisions that are notionally taken by the Trustees. In the face of the facts that the scheme Actuary and the Auditor [a Chartered Accountant] must sign off the fund at least once a year, confirming that it meets the law and the standards set by their professions, the [usually non-expert] Trustees are virtually bound to follow any guidance from these signatories. Despite rules and 'Chinese walls', the accountancy giants manage to sell a lot of advice to their clients: the actuaries, who have no comparable constraints, have huge 'advisory' power to steer the funds into investing the deferred pensioners'' money according to their very limited understanding of the economic system.

In 1987 almost exactly 50% of all investments by pension funds were in shares - equities - whose market prices vary regularly but over the long term rise significantly in market valuation. The other half was in government and other bonds, property and other assets that largely compensated in the stability of their prices for the volatility of the stock market. This ensured that whenever a fund member came to retire the fund could allocate them either a generous pension drawn from the future income of the fund or a large 'pot' of cash with which to buy an Annuity. The funds that backed Annuities were split between equities and other investments in broadly the same proportions as applied to pension funds.

In in the early 'nineties, Actuarial Tables [the basis on which scheme actuaries assessed how long fund members would live, and thus what each member's demand on the fund was likely to be, from the date of retirement] were hopelessly out of date: longevity had increased far beyond the assumptions shared by actuaries.. Hence they started to say that funds were over-funded, which came to the ears of the scavengers in the Treasury who decided to tax any 'over-funding' of pensions. So many firms declared a 'pensions contribution holiday', usually just on their payments-in to the fund, which meant that the tax on the employees' contributions was slightly reducing the pool of money available for the future pensions. Then the actuaries' idiocy was recognised, and many funds were suddenly under-funded according to the updated longevity tables. So firms and employees were asked to put more into the funds.

This was in the mad era of the 'dot-com bubble', which challenged comparison even with the idiocy of the early eighteenth-century 'South Sea bubble' when firms that had never made profit - in some cases had never received revenues - were valued in millions of pounds. The turn-of-the century [1999-2001] boom was 'valued' in trillions of dollars: and inevitably the collapse of that market dragged down the prices of sound industrial and commercial shares in a general panic. The combined impact of the miscalculations of the actuaries in the 'nineties and the crash of 2001-3 was to create in the 'actuarial profession' a panic conclusion that shares were a bad investment generically.

 If a bond has a date for encashment, and a stated sum to be repaid on that date, it is relatively simple statistics to guesstimate reliably what the bond is 'worth' on any date. So as share prices were cashing down right across the spectrum actuaries - encouraged by Gordon Brown's Treasury [which was already industriously increasing the taxation of funds' investments, in the notorious 'three-billion pound grab'] - demanded that funds sell their shares and buy bonds. This intensified the collapse of share prices, while raising the prices of bonds; reducing the total valuation of assets in the funds and removing most of the assets that could have replenished the funds as stock markets recovered. The same tactics, of selling shares and demanding bonds, were required in the crunch of 2007-9: and this time it really suited the government because they needed the future pensioners' funds to buy the bonds with which they funded the deficit.

The net result of all of this is that now only 5% - yes, one-twentieth - of pension funds [on average] are invested in equities which have risen strongly since the crunch, while most of the rest is in government bonds whose riskiness increases by the day. Most companies have closed their 'final salary' pension funds, giving the staff the chance of getting only defined-benefit schemes or of choosing a private pension entirely at their own risk.  Pensions are massively reduced from their equivalents as awarded by 1999.

George Osborne's cynical decision to give retirees with accumulated 'pension pots' the choice not to buy an annuity, and take responsibility for their own financial survival through a prolonged period of retirement, will potentially exacerbate old-age impoverishment. This sets the cap on a tale of devastation, by which millions of current and future pensioners will live in relative poverty compared to the lucky people who retired just a few years previously, So far, the accountants have taken some of the blame for some aspects of the crunch: but not very much for this facet of the present situation. The long-term depredations of the actuaries have yet to be attributed appropriately The contribution of these actuarial sins to the destruction of the material economy and the increase in the national debt deserve due recognition.

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