Hur värdera ett åtagande att garantera pension?

I am not trained as an actuary or accountant but I am an academic economist and have in the past given lectures in financial economics. There has been a lot of criticism of modern financial economics which failed just when it was most needed, and that this should prompt a rethink of mark-to-market practices.

I really don’t see how mark-to-market helps the valuation of pension schemes in any meaningful way except under fantastical assumptions: that the scheme is suddenly closed, the assets sold and the proceeds used to purchase annuities to pay the liabilities. This is thinking of an occupational pension scheme as if it were a DC scheme of a single individual. But the market prices of the assets of a (large) scheme cannot be realised at the market prices. And there is no reason to assume that a scheme should be regarded as potentially closed. That is a totally unreal assumption for an industry scheme with many sponsors. These assumptions can only be justified by reference to extremely idealised perfect markets. But to assume something that is so unreal is surely not a basis for a prudent valuation.

In Actuaries do take ’sensible’ approach on pension plans, November 11 ) Stuart Southall, Chairman, Association of Consulting Actuaries, did not really answer the concerns that I raised: that there is too much volatility in the funding levels of pension schemes, as they are currently calculated – using modern finance theory -, compared to what would be found from a more practical approach based on matching future earnings with liabilities. In current depressed market conditions this has led many pension schemes to be declared to be underfunded when more direct evidence suggests otherwise.

I believe many scheme trustees share my concerns.

 His statement that  ”There can be no winding back the clock, but it may well be that such an approach would now be leading to more stable outcomes” is worrying because, while apparently conceding there may be grounds for concern, he seems unwilling to reconsider methods that might very well not be fit for purpose.

At a time when economists are making a reappraisal of the utility of ideas such as the efficient markets hypothesis, which have been found, in the financial crisis, to lack empirical content, it would surely be appropriate for actuaries, and all those concerned with pensions including regulators, urgently to do the same, as a matter of elementary prudence.

I must say I feel very nervous when I read people like Stuart Southall recommend ‘sophisticated hedging techniques’. Some hedging is natural, like having assets and liabilities in the same currency, but some hedging techniques depend on speculating in other assets whose prices are expected to compensate based on covariance estimates. But we cannot know what the covariances will be in the future and these techniques might fail when there are shocks that have not occurred in the past, just when we need them to work, as they did in 2008.

In the wake of the crisis there is a growing demand for economists to rethink some of the ideas that have been introduced and adopted in recent years, and which failed to perform in the recent and ongoing financial crisis. See John Kay at and Joseph Stiglitz at who argues that we need a new paradigm.

I think the whole problem is the accounting standard FRS17 which attempts to account for a pension scheme by decomposing it into its components, instead of treating it as what it is. It says baldly that the assets must be valued at market prices and the liabilities valued – in an equally unrealistic manner – as a discounted present value using the current market AA bond rate. So the two sides of the scheme are separated and valued according to different principles.

Why on earth value assets at market prices? What possible relevance can market prices have to a pension scheme? I suppose the idea is that if the sponsor were a company that were liquidated it could sell the assets in the market place and receive the market prices for them. But this is not feasible in the real world. So why has the rule been adopted? It only makes sense in the idealised world of perfect markets. But this would not matter if market prices are true as far as the pension scheme is concerned.

The theory is that the market price of a financial asset is equal to the present value of the income stream of its future earnings, making whatever allowance for uncertainty. So if, for example, the relevant discount rate is the rate of return on AA corporate bonds, then there is no problem. Any deficit is real. But there is overwhelming evidence that the market prices of assets are not thus. They are very volatile. They have been described as reflecting ’irrational exuberance’, variations in investor sentiment. PE ratios are very volatile.

IN my view it is very dangerous to mark to market. One should only do that – especially a regulator who draws up standards – if the market can be guaranteed to be working properly as a market.

Any market can be viewed in two ways – there are two sorts of market participants: those who participate directly and make the market work, and those who assume the market to be working efficiently.

Accountants and actuaries valuing pension funds have – according to FRS17 – to assume the market is efficient. But who is actually doing the work of deciding if the market prices are correct? We know that there are others in the market engaged in practices like delta hedging who just look at changes in share prices (for example). There are also machines that are trading. All of this is creating volatility that is affecting real pension funds. I believe this idea – that markets are perfect and that we can all simply take market prices without questioning them – is doing a great deal of damage.

Lämna ett svar

Din e-postadress kommer inte publiceras. Obligatoriska fält är märkta *