The school of thought that says there is no sustainability problem with defined benefit (DB) schemes is based on assumptions very far off from what actually happened over the past three decades, according to Cardano's chief executive officer.
Speaking at PP's Investment Conference in London on 1 November about why he believes there is a crisis in DB, Kerrin Rosenberg said asset and liability modelling has been an "incredibly misleading and unhelpful tool" and compared it to how "leeches" were once used in medical science.
"The problem is the school of thought that says there is no sustainability problem is basing this on incredibly optimistic assumptions that look nothing like what we've experienced over the last 30 years. If the past 30 years have taught us anything, it's surely that we understand the world less well than we thought we did, and surely that what we think is a normal environment, normal interest rate, normal inflation etc, we have to acknowledge that we can be very, very wrong."
"For the last 30 years if you had done asset and liability modelling what would have happened would have surprised you - it would have been a one in a thousand event time and time again," he added.
"If you have a model that's wrong so consistently, it's not worth very much. Asset and liability modelling is to pension funds what leeches are to medical science - at best it's just a painful waste of money but at worst it gives a false sense of security that you're actually in control and know what's going to happen."
It comes after Cass Business School and The Pensions Institute estimated around 1,000 or close to one in five schemes remain subject to unmanageable stresses and are very unlikely to pay future pensions.
However, the Department for Work and Pensions, the Pension Protection Fund (PPF) and The Pensions Regulator (TPR) have all said there is no systemic problem with affordability or sustainability of DB schemes.
Rosenberg believes this latter view is too optimistic, and warned that a lot of schemes are just not going to make it.
"Half a million people have already lived through a failed DB pension. It's not beyond the realms of reason that there could be another million people or so who will end up in this situation. This is a serious issue and requires a response."
There are several reasons to explain what has gone wrong in DB. Firstly, he said that wider adoption of liability-driven investment (LDI) would have completely changed the landscape. He has calculated that DB schemes would have been £500bn better off by now if they all had hedged their liabilities, under the PPF's modelling.
Secondly, that there is a problem with the governance structure, which he believes should more closely mirror that of the corporate world. One of the issues is trustees are responsible for a process rather than deficits, he said.
"No one is accountable for the deficit. Deficits have grown by several hundred billions of pounds, and yet there's no one who is accountable. It's a huge gap in our governance structure. When trustees are appointed, you're not told you're responsible for making sure the deficit doesn't get bigger."
Although he said he was not blaming trustees, most of which are "intelligent, hard-working people", "they're not directly responsible for outcomes in the same way a financial director of an insurance company is responsible for that firm's performance."
His other solution to the DB crisis is to introduce more flexibility around the process for regulated apportionment arrangements (RAAs), which allow a company to split from a pension scheme to avoid insolvency. They are extremely rare with only 29 deals having ever been approved by TPR since it first began to exercise this power in 2009.
Rosenberg said the rules around RAAs are strict, echoing his comments in an article published in September.
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