On 19 November 2019, the RSS Oxford Local Group welcomed Professor Jane Hutton from the University of Warwick to speak on intergenerational fairness of pensions. This talk was very timely as she had just been commended for advocating for the transparency of statistical evidence in relation to the Universities Superannuation Scheme.
She began the talk with a familiar demographic illustration: population ‘pyramids’ of different countries that have different shapes. In some countries, assumptions of death rates were derived based on those of countries with vastly different demographic profiles and were unlikely to be representative of the population. She also described the lack of statistical rigour in setting other demographic and economic assumptions, such as life expectancies of pensioners’ spouses, the pattern of salary progression and forecasted investment returns.
Statistical shortcomings included: proposing discount rates without any properties of statistical distributions, heavy-handed rounding in intermediate calculations, using several financial metrics of ‘best estimates’ that may not reflect a statistical best estimate, not recognising that the cumulative effect of prudential margins on assumptions is large and increases with number of assumptions used, and applying demographic assumptions that are wildly inconsistent with those published in official statistics.
She highlighted that pension funds drive investment into infrastructure, agriculture, commerce, healthcare and the public sector, and therefore benefit all generations. However, the degree to which they can invest and the types of investments depends on how well-funded they are and how much they set aside (reserve) for future pension payments, based on the assumptions described above. The UK Pensions regulator stipulates that Defined Benefit pension schemes (that enable greater risk pooling) should have adequate reserves or switch to a Defined Contribution structure (which shifts risks to individuals).
Reserves are estimated by balancing present expenditure, future expenditure, risks, costs and benefits to different groups, and whether this balance is fair should be assessed. Being too prudent about demographic and economic assumptions diverts money into reserves and away from other investments, such as investment in teaching and research in the case of a university pension fund. In fact, none of the funds’ stakeholders would be better off. Additionally, she found that different government agencies’ recommendations in relation to investment in government bonds to de-risk pension funds were at odds.
She ended her talk with several open questions on the fairness and sustainability of old age care provision, and our willingness to provide for old age.
After the talk, when asked how individuals could take action, Jane advised that we can write to the Pensions Ombudsman to ask about the operations of our own pension fund. In contrast to the financial sector, statistical literacy and consensus within the medical sector was historically low but had improved greatly in recent years. Jane acknowledged that it takes a lot of determination and support to speak out about these issues. She then described her experience of whistleblowing, involving correspondence with numerous regulators, lawyers and professional bodies over several years.