Pensions promise: Between a rock and a hard place

29 Sep 2014

What exactly is the pension promise and what does it need to ensure? Should quality of life also be taken into account and, if so, what does that mean for investment strategies? Emma Cusworth investigates.

“For social impact investment to really expand, it will have to be seen as having your cake and eating it. The investors’ goal may be to have their cake and eat it, and still have a sense of creating benefit beyond just making money.”

Simon Chinnery

The pensions promise is a fairly fluid phenomenon. Over time British workers have had to repeatedly adjust their expectations, typically downwards. The reasons for this are increasingly difficult to argue with: the promise has cost some firms so dear, their deficits are larger than their corporate value; government debt is running at about 90% of GDP; and, perhaps most poignantly for some, a small, but increasingly overstretched and regulated group of people remain responsible for delivering on those promises.

Understandably, the legal interpretation of the pension promise is therefore critically important in determining how institutions invest their beneficiaries’ money. Under that definition, financial return sits top of the list.

A DIFFERENT DEFINITION

Yet a shift is beginning to gather momentum that poses a poignant challenge to the assertion the pension promise is just about financial gain.

Saker Nusseibeh, chief executive of Hermes Investment Management argues: “The experts in the City; the economists, the actuaries, the financial wizards, all seem to agree that the pension promise is to try to deliver roughly 60% of members’ wages adjusted for inflation. However, inflation has a different impact on the individual depending on their income level. Putting food, energy and health inflation together accounts for around 23% of the GDP inflation basket, but for a pensioner it is roughly twice that at 46% of his inflation basket.

“Imagine what a double insult it would be to use pensioners’ assets in a way that makes them a percent or two higher nominal return,” Nusseibeh continues, “but which then creates an ecosystem where food and energy prices are substantially higher in real terms by the time they retire.

“That is not only a dereliction of fiduciary duty, even within the bounds of the current understanding of Trust Law, but in fact a form of negligence,” he states. “The pension promise should be about delivering a living standard that is roughly 60% of what the beneficiary enjoys today 30 years down the line.”

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