By Richard Butcher
There are, it is said, only two things in life that are certain: death and taxes. Despite this (and even though we spend a lot of time talking about tax) death is an almost taboo subject for discussion.
Commercial mortality isn’t quite the same, but it has its own related taboo. While it’s easy to talk about the death of a businesses, very few seem to be prepared to countenance the mortality of their own business or, more importantly, to discuss how it might be avoided. The fixed mental state seems to be “this is a good business, it will always be a good business”. The pensions industry is full of businesses like this.
65 million years ago dinosaurs became extinct. They faced a sudden and catastrophic event that changed their world in such away as it could no longer support them – a giant meteorite crashed into the earth throwing up huge clouds of dust that blocked sun light which, in turn, killed the food chain. Dinosaurs weren’t intelligent so its perhaps reasonable that they failed to plan for this. The pensions industry is intelligent but is facing a similar “catastrophic” event (although I guess that depends on your point of view) in a very dinosauric way and, unlike the events of 65 million years ago, this has been coming for some time.
The extension of defined contribution pensions to the employed in the 1980s, combined with the abolition of compulsory membership of occupational pension schemes and improving human longevity (ironically) combined to create a sequence of events that if not predictable seem now, with hindsight, inevitable: the slow death of DB, the decline in pension coverage, the resultant policy decision to introduce soft compulsion and the emergence of scale in DC.
How is this catastrophic for the industry?
There are fewer pension schemes around and the number is reducing – despite, perhaps ironically, the fact that there are more members and assets than ever in pension schemes. The result of this process is fewer but larger schemes. Put another way: the pension commercial food chain is in sharp and rapid decline and so, inevitably, there will be extinctions.
The industry reaction to this isn’t universal but is common: “the DB tail is long enough to keep us going” and “we’ll win an increasing share of the market”. It also, although less explicitly, squeezes more and more money out of the remaining schemes.
These reactions can be dismissed quickly: you can’t all grown into a declining market and if you can’t grow you’ll lose talent and then clients. The tail will wag you off!
Let me set out a discussion and the final question is the one few dare to ask:
Client: “will you be around long enough to service my pension scheme?”
Player: “oh yes”.
C: “how is your business sustainable?”
P: “the DB market has a very long tail and we’ll win an increasing share of it.”
C: “what if you’re wrong, what’s plan B?”
Darwin didn’t talk about survival of the fittest, he talked about survival of those most able to adapt. If you want to know if your service provider will be around long enough to service your pension scheme, ask them how they propose to adapt.