On the political economy of UK pension scheme regulation

J. E. Woods

Cambridge Journal of Economics, 2017, vol. 41, issue 1, 147-180

Abstract: We take the opportunity of the recent Consultation Exercise on UK defined–benefit pension schemes conducted by the Pensions Regulator to examine the approach to pension scheme portfolio management that it and the related Pension Protection Fund have adopted. After summarising the regulatory basis, we identify three essential building blocks for further examination: the notion of matching liabilities to long–term (government) bonds, the use of standard deviation of return as a measure of risk and the idea that strategic asset allocation is the most important decision in portfolio management (this last one, the Brinson axiom). We examine these foundations individually and then collectively with the aid of two unobtrusive postulates—the first being the efficient markets hypothesis and the second that pension scheme assets should be used to purchase only those securities with minimal default risk. From the perspective of what we have elsewhere called the Keynes–Graham schema, we conclude that the foundations are unsound and that the conventional approach, adopted not only by both the Regulator and the Protection Fund but also by the major actuarial consultancies, induces, if not actually requires, pension schemes to engage in speculation rather than investment.

Keywords: Defined–benefit pension schemes; UK regulation; Duration; H. Markowitz; G. P. Brinson; Asset allocation versus security selection (search for similar items in EconPapers)
JEL-codes: G11 G18 G23 (search for similar items in EconPapers)
Date: 2017
References: Add references at CitEc
Citations:

Downloads: (external link)
http://hdl.handle.net/10.1093/cje/bev048 (application/pdf)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:oup:cambje:v:41:y:2017:i:1:p:147-180.

Ordering information: This journal article can be ordered from
https://academic.oup.com/journals

Access Statistics for this article

Cambridge Journal of Economics is currently edited by Jacqui Lagrue

More articles in Cambridge Journal of Economics from Cambridge Political Economy Society Oxford University Press, Great Clarendon Street, Oxford OX2 6DP, UK.
Bibliographic data for series maintained by Oxford University Press ().