Pensions Conference 2012: Review of Workshop B3 - An analysis of pension security and economic efficiency

Pension Economics (or how DB Pensions are affordable after all)

In a wide-ranging talk on the macroeconomics of pension provision, Con Keating of BrightonRock challenged some of the frequently-stated justifications for the apparent inevitable decline of DB pension provision.  Specifically he postulated that in fact DB pension provision is eminently affordable. Particular points covered included the following.

Demographics

• the impact of increased longevity is actually relatively minor in the context of aggregate consumption
• as life expectancy increases there is an argument for taking investment risk for longer
• there is no evidence that an increase in the proportion of the population over 60 reduces GDP
• raising the state pension age disadvantages the poor (who don’t live as long)

Taxation

• the retired will become a new tax base
• the tax-free lump sum is a historical anachronism

Funding

• a pension is a claim on future production
• if the pension is less (as a share of GDP) than the current consumption foregone, there is a welfare loss
• it can be shown that an ‘equitable’ outcome balancing consumption foregone for retirement income requires a return on capital employed which is not unreasonable

Conclusions

• DB is more efficient than DC (risk pooling, economies of scale, sponsor guarantee)
• A book-reserve approach could provide DB pensions at around half the cost of current funded approaches.

Overall, it was clear that by looking at the financing of pension schemes from a different perspective to that typically adopted by consultants, clients and regulators it is possible to reach very different conclusions!