Occupational Pension Schemes are regulated in the UK by The Pensions Regulator (TPR). TPR has recently conducted a consultation on the principles to be adopted when funding a Defined Benefit (DB) pension scheme, details here: https://www.thepensionsregulator.gov.uk/en/document-library/consultations/defined-benefit-funding-code-of-practice-consultation

Economic thought is fundamental to funding a DB pension scheme. in particular, long-term economic thought is required, as currently pension liabilities are typically expected to run off over 50-70 years (depending on the pension scheme).

In contrast, the thinking that goes into running markets and businesses can sometimes be somewhat short-term. In the extreme, investment managers ‘worry’ about quarterly returns, and company boards are focused on annual results. Strangely, pension schemes are often the entity selecting investment managers, and applying capital to companies – and they ultimately want long-term results. This apparent failure in market dynamics has been dubbed “the tragedy of the horizon”, as time horizons are so different between different market participants. Further details here: https://www.bankofengland.co.uk/speech/2015/breaking-the-tragedy-of-the-horizon-climate-change-and-financial-stability (Also search for latest talks by Mark Carney on this topic, for example at Lloyds.)

How should economic thought be adopted by pension schemes? Let’s discuss!