From the Flight Deck

I'm a social media innovator and advisor to the financial services industry. I focus on pension plans and how to make them work.

Connect the dots …

From the earliest age we love to connect the dots. On any holiday charter flight, a child with furrowed brow is concentrating hard, drawing lines between numbered dots on a page. Dots that look random and meaningless until the carefully drawn pencil lines finally reveal an etching of the three bears staring in disbelief at Goldilocks asleep in Baby Bear’s bed.

Life is a bunch of dots. It always has been. Some people are better at seeing the picture than others.

A man in ancient Greece lowers himself into a bath of hot water. Dot. The water level rises. Dot. The man knows it always rises by the same amount when he gets in the bath. Dot. It rises by a different amount when his wife, Erika, gets into the same bath. Dot.

"Yo! ‘Rika, maybe there’s a Principle."

A 19 year old geeky kid who’s good at programming creates a simple site so his other sad geeky friends can congregate online to discuss the relative merits of the girls on campus. He launches it from his Harvard University bedroom on February 4, 2004. The site goes wild with activity.

In a couple of hours it overloads the university’s servers. Dot.

He writes some more code so that they can all post cool stuff about themselves and share pictures and “status updates" online. Within a few weeks there’s so much activity it melts the servers of several universities across the US. Dot.

Hey, maybe everyone on the planet - not just sad geeky people - would like this site.

It wasn’t the first time someone had built an online platform for a student community. But it was the first time anyone connected the dots.

Now, those connected dots are worth $100,000,000,000 give or take. It’s not always about creating the dots; usually, it’s about connecting them. Each dot is nothing special on its own. It’s the connecting up that unleashes the power.

Plenty of folk knew about m. They were also familiar with E and c. They were three dots. Only one guy connected them and showed that E=mc2. In other words, matter and energy are really just different manifestations of each other!

In this insanely fast-moving, tectonic plate shifting, technology-driven, austerity-ridden, 2012 world, it is more important than ever to connect the dots.

The thing is, dots just look like dots until someone connects them. Some people are great at connecting dots. Others refuse to see the picture even when someone else connects the dots.

Take Kodak. The iconic brand invented the digital camera. Dot. No messy, hassly, inefficient, expensive film development required with digital photography. Dot.

People can take loads more great pictures than they can with film. Dot.

Phones can double up as cameras. Dot.But Kodak didn’t like that picture (they were all tooled up for a world of glossy film) so they pretended it wasn’t there; as if the dots were just dots. So Sony, Canon, Nikon and Apple connected them instead.

Now Kodak is in Chapter 11 insolvency. Which is what can happen when you don’t connect the dots.

Random Pension Dots

Back in 2003, there were a bunch of random dots:

Regulation and accounting rules suddenly forced companies to treat the highly volatile pension deficit as a real and present debt on the sponsoring company’s balance sheet. Dot.

The major driver of pension deficit volatility was the liability side of the equation, not the assets. Dot.

Only a meaningfully large investment in long-dated government bonds (or, better still, interest rate and inflation swap contracts with similar effect) matched the liabilities. Nothing else. Dot.

Real interest rates began to fall, more or less steadily. Dot.

Pension liabilities are measured using real interest rates. As real interest rates fell, the liabilities rose. Steadily and a lot. Dot.

By 2005 there were a heck of a lot of dots waiting to be connected.

Amazingly, many pension funds and their investment advisors looked at those dots through a Kodak lens. They didn’t like the picture, so they behaved as though it wasn’t there.

When you asked them why they waited to hedge, they typically replied that better times were ahead. This turned out not to be the case.

And all the time, someone else was connecting the same dots and purchasing the very hedges they should have purchased.

What’s done is done. (Or, more accurately, not done).

Now here are some more random dots:

Corporate sponsors are slowly suffocating under the weight of their underfunded, unhedged plans. It is an agonising way to go. Dot.

Corporates cannot take much more of this. The very life blood is being drained from their essential corporate activity - which is already under severe strain due to particularly austere economic conditions created by Greeks, Bankers, Germans, French, the Government, Californian Mortgages, Sir Fred (sic), et al. Dot.

The real yield is now negative and is clearly NOT floored at zero. Dot.

Often, prices rise even when you don’t think they should. Gold, Oil, Gilts, houses in South Kensington. It’s a function of supply and demand. Dot.

The price of gilts and swaps is still rising. Dot.The UK government recently decided (because it can) to print some money (£50bn) and has gate-crashed the gilt-buying party. Dot.

New regulations from the EU are about to force pension plans to manage risk intensively. Some people think it is a good move. Others think it is a dumb move. It doesn’t really matter. It is happening. Dot.

There are not many remaining investment safe havens but gilts are still considered to be among the safest of safe investments. Foreign investors (Greek, Saudi, Libyan, Egyptian, Chinese, Russian, Italian, Spanish, Irish, Portuguese etc) prefer gilts to their own government debt. There is still plenty of demand for UK government debt. Pension funds, the UK government, everyone else are all still buying gilts. Dot.

These austere conditions are not about to go away anytime soon. Profligate ouzonic countries are not about to start behaving like efficient Teutonic citizens. Besides, it is almost certainly, tragically, too late. The ship has hit the rocks and is capsizing. It may take a bit longer, but soon it will be on its side, sliding off the edge of the Euro reef. Dot.

Technological innovation is altering the corporate landscape more quickly than at any point in history, including the Industrial Revolution. Corporations cannot predict who will shortly put them out of business by connecting dots. In 2012, it must be terrifying to be CEO of Iconic Brand PLC. Dot.

Lone individuals with A Great Idea can now severely disrupt the establishment. And to do so costs, er, nothing. Dot.

Those are the dots.

Now here’s an emerging picture. A truly perfect lightening storm is arriving for the pensions industry and the clouds are dark and heavy.

If you run a pension plan (or a corporate sponsor of a pension plan), there is no choice but to implement an effective risk management strategy. Every day you delay, the risks increase exponentially.

The next couple of years will herald the rating downgrades (and, in some cases, the insolvency) of iconic brand corporations that failed to connect the dots.

Either they will be technologically obsoletized (new word) or the cost of their pension deficit bill will take them under. Or both.

For some, there is still time to address the situation; but not much.

Those are the dots.

That is the picture.


How prepared is GenY for their future retirement provision?


This unintentionally awesome video is one of the examples in this story about how and why the ad industry is targeting the olds in a whole new way.

Rise Of The Olds: Advertising Catches Up With A New Demographic

The perennially ignored over-60 demographic is silent no more. From music videos to film, older people are everywhere. And now even the ad industry can’t ignore them.


The (US) budget explained in simple English! Frightening when you understand the relative quantum


The (US) budget explained in simple English! Frightening when you understand the relative quantum

Coldest night for decades in Hertfordshire, England.

Coldest night for decades in Hertfordshire, England.

The Pension Fund Trustee Handbook


The Pension Fund Trustee Handbook
This is a completely updated edition of the handbook, taking into account the new obligations for trustees created by the Pensions Act 1995. It aims to provide trustees with simple information and advice on their new responsibilities. Take Action! Get it immediately!!

Abu Suleiman was working methodically to wrap the body of a seven-year-old girl in a white shroud. He didn’t flinch as a volley of mortar bombs crashed down only a street away. He has been preparing the dead for burial since the start of the uprising. Last week he had his busiest day.

Carefully, he folded over the white cloth to cover the girl’s curly chestnut hair, matted with blood. He did not clean it off. ‘If they are killed by a bomb or a bullet, we don’t wash their martyrs’ blood,’ he said. He wrote the girl’s name on the shroud, Nuha al-Manal. […]

He shouted at a hysterical woman in the makeshift hospital. Her son’s foot had been neatly severed by a mortar. Someone was holding it, wrapped in a bloody keffiyeh. She was ululating, clutching her face. ‘Give us guns so we can defend ourselves,’ she wailed, piercingly. Abu Sufyan had no patience with this. ‘We’ve had a hundred martyrs already today,’ he bellowed. ‘Get out so the doctors can work.’

Most of the casualties we saw were civilians and many were children. An 11-year-old boy was brought in. Most of his face had been torn off in an explosion. Everything below the mid-point of his nose was gone, bloody shreds hanging over a hole where his jaw and mouth had been.

Bombs were continually falling outside. People were screaming in the corridor. The boy was still conscious. We caught a glimpse of eyes wide with shock before the nurses pulled a screen across. We decided to try to find a surgeon outside Syria who could reconstruct his face, but the boy died of his wounds the following day.

The Guardian’s Paul Wood in Homs, Syria (via pantslessprogressive)

(Source: pantslessprogressive)

Cry! It’s a Kodak Moment.

In October 2003, a leading finance magazine published an upbeat interview with the pensions manager of Kodaks £800 million UK pension scheme, in which he disclosed details of the plan’s new and daring asset strategy. The scheme, he explained, had invested 35% of its assets across 40 hedge funds with just 2% remaining in equities.

It was a new and different approach, with the ambitious aim of out-performing run-of-the-mill, bog standard, equities
by around 2%. In fact, the whole portfolio had been carefully set up to be diversified and intelligent, seeking additional asset returns.

Light at the start of the tunnel

In the beginning, it was a picture of success: Kodak produced a positive return of 12.1% making it the best UK scheme within the WM2000. Last year it produced a top-decile performance by restricting its losses to -3% against a peer group average of -14% said the article.

In 2004, the UK pension scheme
s property portfolio also duly appreciated in value.

Back then, it is fair to say, it was all looking good.

So much so, that the parent
s 2003 annual report (p31) proudly proclaimed:

The Company does not expect to have significant funding requirements in relation to its defined benefit pension plans in 2004.

That was then…

Today, however, as the embattled US Kodak parent finds itself in the dark room of Chapter 11 insolvency, its badly under-funded UK pension scheme is learning a bitterly painful lesson.

For whilst Kodak’s US high command insists that it is
business as usual in Europe, the glaring harsh reality is that it is highly uncertain, to say the least, whether the UK pension plan will find the £440 million deficit it requires in order to make all the payments due to its present and future pensioners over the remaining life of the scheme. Kodak UK is unlikely to have sufficiently deep pockets.

How did it all go so wrong?

It is not that Kodak failed in 2003 to consider the potential problem of rapidly rising pension liabilities. At the time, the pension scheme manager said:

We are not convinced that future equity returns would generate enough alpha to cover liabilities. Instead, we have taken a diversified approach.

The pension scheme’s management team was plainly fully aware of the risk of unfunded liabilities and believed it had come up with a game plan.

Nor was the new investment strategy impetuous and unconsidered. As the article pointed out:
[The pension scheme manager] has evolved his strategy over time.

And this was no renegade embarking on an unsupervised frolic of his own:
[He] has involved his trustees at every stage.

No. The tragedy for Kodak is
not that the trustees and pension plan managers et al failed to think about the problem. It was, quite simply, that they failed to implement the correct solution.

By way of evidence, and in contrast, just eight weeks later, in early December 2003, a similar sized UK pension plan, Friends Provident Pension Scheme,
did successfully implement a hedge and, in so doing, protected the FP Scheme from its principal predator: the Collapsing Real Yield (CRY!).

The CRY!

The CRY! is a savage beast of terrifying ferocity. It has ripped (and is currently ripping) the beating hearts out of defined benefit pension plans around the globe, pushed pensioners by their hundreds of thousands closer to the cliff-edge of old age penury, and stolen the golden years from an entire cohort of the vulnerable elderly.

The CRY! is ruthless. It propels pension liabilities skywards without a second thought. It drives the
present value of pension plan obligations up into the stratosphere, miles beyond the reach of almost any asset performance. It draws no distinction between private sector and public sector workers.

Between the years of 2003 and 2012 (present day) the CRY! has eviscerated pension plans, brutally exposing those who clung doggedly to the belief that the CRY! was a chimera, a bubble, a mirage, and therefore failed to fight fire with fire. The CRY! is now exacting a terrible price.

Kodak, tragically, fell into that category. It is a reasonable assumption that in 2003 their pension scheme
supremos in Hemel Hempstead (UK) and Rochester (US), considered the risk of the CRY! but, along with many other pension plans, it seems they did not implemented the anti-CRY! solution.

Put simply, in 2003 Kodak faced
three risks:

Risk One The risk of the Collapsing Real Yield! That is, the risk of sharply falling long term interest rates, coupled with simultaneous rising inflation. This toxic combination would cause Kodaks pension liabilities to rise uncontrollably; if the CRY! came to pass, the pension plan would be in serious trouble.

Risk Two The risk of their newly diversified “growth” assets failing to perform the heroic growth targets demanded of them. This would result insufficient assets to match the CRY!-ravaged liabilities.

Risk Three The risk of Kodak (UK) pension schemes sponsoring corporate far away in Rochester, NY, becoming insolvent and leaving the UK pension plan with no external means of support. If, in the nightmare scenario, Risks One, Two and Three all materialised, the pension plan would be cast headlong into the UKs Pension Protection Fund along with an unquantifiable number of other failed pension plans.

Given those risks, it would have been prudent to comprehensively hedge the scheme. But from the size of the deficit today, the signs are that they did not. My hunch is that in the final analysis, Kodak just did not believe that the Collapsing Real Yield would materialise.

Further, they could not conceive that their carefully-crafted diversified alpha-seeking asset strategy would be insufficient to meet the onslaught of the CRY!.

Nor did they anticipate the US mother ship becoming insolvent mid-way through its agreed pension contribution schedule.

Certainly, they never dreamed for a second that ALL three events would occur. But they have.

It is a perfect storm.

Disastrously for Kodak, Risks One and Two have been materialising ever since that interview back in 2003. The Kodak UK pension plans liabilities are now a stunning £1.6 billion whilst the assets are, apparently, a mere £1.2 billion. The CRY! helped to wipe out £440m(!) of assets.

Risk Three
materialised last Thursday.

Game Over.

Ironically, in the 2003 interview, the pension scheme manager made the point that he hadtaken care to consult his sponsor’s corporate treasury department. ‘Which Is only right. After all, the support of the sponsor is the biggest asset we have.’”


So what are the key lessons from all this?

Here are three:

Lesson One: The Sponsoring Corporate can become insolvent. This can occur despite oft- repeated assurances to the contrary from the sponsoring corporate. Super-advanced technology is obsoletizing (new word) established iconic platforms and processes. Kodak somehow missed the digital camera revolution (despite having invented the digital camera)and got blown away by more nimble competitors. Theyre not the first and they wont be the last.

Lesson Two: Attempting To predict the markets and betting the farm that killer risks (such as the CRY!) won’t materialise, is a costly error. If your assumptions, predictions, prognostications and assorted gambles turn out to be wrong, there will be irreversible problems for the pension plan. Instead, you should implement a risk management strategy. There is no alternative.

Lesson Three: It is mystifying why, although Parliamentary and Congressional Hearings are routinely held to consider the sudden collapse of other financial organisations, pension plans that fail are assumed to be victims of a series of unfortunate events.

Why is no-one ever held accountable when a pension plan ends up with materially fewer assets than liabilities and a bust sponsor? Who was asleep at the wheel? What was the advisors’ advice? Where was the Kodak global pensions risk management strategy? Why did the Corporate not take action earlier? What did it choose to spend its cash on instead? Why did the pension scheme’s trustees not bang harder on the CEOs door whilst there was still money in the pot? What was the Pensions Regulator doing?


Answers are important. Otherwise - watch this space - there will be multiple digital copies of this Kodak Moment as the same sequence of events plays out for pension plans and their sponsoring corporates across multiple industries in multiple lands.

Burgeoning Pension Liabilities? Welcome aboard the Costa Concordia.

The rock was not marked on my nautical chart. It indicated that there was deep water below. There should not have been such a rock.

Capt. Francesco Schettino, La Costa Concordia 14 Jan 2012

You are a trustee of a pension plan. It is your responsibility to ensure that the benefits of all the plan’s members are delivered in full and on time.

Or, to think of it another way, you are a senior crew member of a gigantic ocean-going cruise liner. There are thousands of passengers on board - it is more of a floating city than a ship.

Fathers, mothers, sons and daughters, grandparents, are all taking the trip of a lifetime; all trusting that you know where you are taking the ship. They assume that you have a detailed map of the currents and waters in which the vast vessel is sailing.

Of course, they understand the ship may encounter unexpected incidents and eventualities during the voyage - violent storms and suchlike - but this is an ultra-modern ship (it cost 400 million Euros to build). Besides, this is 2012 and the age of super-smart technology. It is the era of Apple and the Higgs Boson. It goes without saying, you and your fellow crew members have access to the most sophisticated charts, maps, radar and sonar technology.

Naturally, the passengers assume, the crew has a gameplan for every conceivable nautical scenario.

So, as they settle down to the divine creamy lobster bisque alongside their fellow diners in one of the stunning dining rooms on board your ship, not a single person contemplates the possibility that maybe, just maybe, the crew has no idea of the ship’s true position.

Or, worse, that the crew does not know that it does not know its location. That this vast vessel laden with several thousand souls may be on the brink of epic maritime disaster. The very notion is absurd.

(Everyone on board has seen Titanic, but that happened a hundred years ago for goodness’ sake and we’ve learnt all the lessons.)

Thus, if, over dinner, anyone was to suggest in conversation between genteel sips of Barolo Granbussia Riserva 1999 that the immense vessel you command might in fact be way off course and headed for lethal rocks in shallow water, that the entire 114,500 tonne ship will shortly capsize in darkness and chaos, that the captain and crew (despite mingling freely with the passengers and exuding a cool, confident, air of professional calm) have no viable gameplan in the event of such a catastrophe, why then, I suppose their fellow passengers would tell them to relax, calm down dear and just enjoy the cruise.

But that is exactly the analogous position of many pension plans today:

1. The long real yield (used to discount pensions) is undeniably negative, forcing the razor-sharp and jagged pension liabilities ever upwards, far closer to the ship’s hull than most captains and crew ever anticipated or planned for.

2. Over the last decade, equities (that staple diet of most defined benefit pension plans) have not delivered those much-vaunted deep sailing waters, and the assets of many pension plans are consequently now a lot shallower than conventional maps predicted they would be at this point on the trip.

3. As the European economy crashes onto its own private Mediterranean rocky reef, the corporate sponsors of many pension plans (or in the case of public sector pensions, the government) are facing challenging financial problems. So whence those promised lifeboats of additional corporate funding for pension deficits?

Not enough of them. Not seaworthy. On the wrong side of the ship. Upside down in the water. Already full. Not fit for purpose. Etc.

Few would argue with the assertion that the pension industry’s oceanic landscape is now dangerously uncharted and unfamiliar.

None of this was supposed to happen. But then, the Costa Concordia wasn’t supposed to sink.

Maybe the pension plan’s captain is at his post on the bridge; perhaps he’s in the bar mingling with the rich and pretty guests; or maybe he is in one of the sweltering galleys below deck, checking on the homemade pasta.


Your mission is simple. Excuse yourself from dinner, make your way to the deck and look over the ship’s rail.

The rocks are so close you’ll be able to see them.  There may still be time to yell down to the captain.