A pension fund manager friend of mine went to the bar last week to buy me and another mutual mate a beer. He was clutching a £20 note and asked if anyone had a tenner in case he didn’t have enough to get the round. (I point out we were at a Liverpool St station watering hole not the Ritz.)
“Another tenner?” said mutual mate. “How much do you think a pint costs?” It turns out there was little change from £20, and had he heard the request for pork scratchings he may have had to break into the extra note.
So – apart from reinforcing the idea that the pensions industry drinks mid-week beers, why am I writing about it?
Fast forward to the next day and I’m in a meeting with an asset manager who specialises in emerging market economies. Sipping a green tea and nibbling on an exotic fruits cereal bar (it was not a late night) we wandered on to the topic of pensions promises and despite strangling companies along with the people appointed to meet them, they are likely to be largely irrelevant in the coming years.
“Many defined benefit pension fund members are not going to be able to buy anything. They’ll have what they’ve been promised, yes, but that’s not going to be anywhere near enough,” fund manager A said.
“CIOs and trustees should be managing towards the purchasing power of their members, which is going to be vastly higher than what they believe now.”
This echoed a conversation with a Northern European pension CEO a year ago.
The basic thesis is this: In the UK pensions are managed according to inflation rates in the domestic economy. Whether we are looking at the Retail or Consumer Price Index is largely inconsequential.
The majority of pension members still have decades of work ahead of them, during which time the developing economies will continue to grow and take what little manufacturing processes we retain in the ‘developed’ markets away from us.
Figures to back this up: 85% of the world’s population – and therefore labour force (which is also a conservative estimate given developed markets’ ageing population) – live in the emerging markets. They are already the main consumers of commodities and soon these economies that have a much lower debt-to-GDP ratio than us may start to take command.
OK, we have paid the piper so far, but anyone arrogant enough to believe that our heavily indebted countries with armies of pensioners and unemployed youngsters can continue to call the tune should probably wake up and smell the coffee (if they can afford it).
“These developing economies will be the price setters,” said fund manager A – and despite a clear agenda on his part, I find it hard to disagree.
His estimate was that 50% of what we consume – and price increases therein – will come from these new production giants and this is not taken into account when actuaries and consultants issue inflation forecasts for pension funds – or any other investor with liabilities for that matter.
So yes, DB pension fund members might get what they were promised, but best of luck to them in only buying goods produced in the UK – where their benefit increases are based – and tying down the rest of the economy to deny the change.
All of a sudden having a defined contribution pension fund wherein I set all the projections myself doesn’t look too bad.
And for the moment, lager is mainly brewed in Europe, so I’ve some time yet – it’s when green tea and guava-infused cereal bars become a regular occurrence I may have to worry.