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.

Kauto Star Performance

Every now and then, exceptional form and talent come to the fore and combine unarguably, imperiously, to blow away the competition.

That’s what happened on Boxing Day last year when racehorse Kauto Star won the King George VI steeplechase at Kempton Park for an unprecedented fifth time.

The racing world united in praise for a horse which has been described in the following terms:

ultra consistent, incredibly tough and extremely versatile; he possesses a devastating turn of foot, a unique talent among staying chasers.”

Here’s what we’re talking about in Kauto Star:

He’s the only horse to have won the King George FIVE times.

In his first six years in Britain he competed in 18 Grade 1 races over distances from 2 miles to 3 1/4 miles. He completed 15, winning all but one. His sole 2nd place came in the 2008 Gold Cup to his stable mate, Denman.

His official rating of 193 (given after his 4th King George win) was the highest ever awarded to a Steeplechaser.

Finishing 3rd in the 2011 Gold Cup, Kauto maintained his record of never finishing outside the top three places in any of his 27 completed races in his 7 seasons in Britain.

He’s the only horse to have ever regained the Cheltenham Gold Cup.

He’s the only horse to have ever won two separate Grade 1 (or Group 1) races more than four times (Betfair Chase 4 times and King George 5 times). He also won both races under three different Prime Ministers.

He has won more prize money than any other National Hunt horse in the history of the sport.

He is the only horse to win Grade 1 races in 7 consecutive seasons.

He is the only horse to have won 16 Grade 1 races in total.

Along with Denman he has competed at the Cheltenham festival 6 times in a row.

Thus, Kauto Star is now firmly ensconced in the pantheon of race-horse legends alongside those all-time greats, Arkle and Desert Orchid.

But it would be a school-boy’s error to speak of Kauto Star without also recognising that he is part of an extraordinary double act.

Ruby Walsh is the jockey who brings Kauto Star’s potential to brightly burnished fulfilment. Walsh is one of the world’s great jockeys and has ridden more than 1,400 winners in a glittering career.

At the 2009 Cheltenham Festival Walsh rode a record-breaking seven winners over the four days. On the second day of the 2010 festival he rode Sanctuaire to victory in the Fred Winter Juvenile Novices Handicap Hurdle and therefore became the jockey with the most wins in the history of the Cheltenham festival.

Ruby Walsh understands and rides this phenomenal horse better than anyone, and this incredible once-in-a-generation partnership of horse and rider is the key to the mind-blowing statistics. Indeed, Walsh has ridden Kauto Star on 17 out of his 23 wins.

Kauto Star Pensions
And so to the topic of pensions and the successful management of the valuable, yet scarce, assets required to provide adequately for pension plan members in retirement.

The tectonic plates are shifting fast in this besieged industry.

As it rapidly becomes all but impossible for a lay board of pension plan trustees to navigate the treacherous and volatile markets in which we find ourselves, there is growing demand for a more holistic framework that provides world class strategic advice whilst also managing the assets against the liabilities.

Traditionally, those two functions (advice and asset management) have resided in very different places. Strategic investment advice comes from the stable of the investment consultant whilst asset management comes from the money managing fraternity.

That functional distinction is, perhaps, no longer fit for purpose. These days, pension plans are asking for something different and better.

They want Kauto Star, field beating, world class, asset management AND strategic advice in seamless combination. In other words, they want team work and joint responsibility.

How do you get Kauto Star performance? Not without Ruby Walsh. How does Ruby Walsh lift the King George five times? Not without Kauto Star.

Perhaps the answer to our clients’ request, is to pull off the previously unthinkable: an unbeatable alliance of the world’s best and most versatile asset management with the finest investment consulting services.

The asset manager is Kauto Star. The investment consultancy is Ruby Walsh. The pension plan is the owner.

Audacious yet obvious.

At stake is the greatest prize of all: the on-time delivery of EVERY promised pension payment to the owner’s members.

Just think.

Running a Pension Plan in 2012? You need a 20 Mile March.

In Jim Collins’ latest book (Great by Choice) he offers a compelling illustration. Imagine two people in San Diego, California, who both plan to walk to the tip of Maine on the other side of the USA. It’s a journey of 3,306 miles and they both set off one sunny Saturday.

Guy One walks 40 miles on the first day (the weather is a nice 20 degrees C); he walks 27 miles on the second (equally nice) day. By Day 3 he is on the edge of the desert and the temperature soars. That day he manages only 8 miles - it’s scorching hot and he’s exhausted from walking 67 miles over the previous two days.

In contrast, Guy Two does only 20 miles on the first day. He could easily have done another ten, but he has a clear goal of 20 miles every day. He walks 20 miles on the second day. On Day 3 he is fully rested and manages a decent 20 miles even though it is baking hot.

Guy One cracks on whenever the weather allows but rests up when it’s against him. When he hits the snowy, windy, high mountains of Colorado he covers barely any ground at all. In fact he is so exhausted he catches a heavy cold and has to stop for a week.

Guy Two just does his 20 miles every day. It’s a 20 Mile March whatever the weather. No exceptions. It means he arrives in Maine several weeks before Guy One. In fact, Guy One is lucky to make it at all, such is his inconsistency and hopeless reliance on the weather.

Collins is neatly illustrating the benefits of solid consistency over fair weather sporadicity. The former always wins out in the long term.

Tip One. Adopt a 20 Mile March approach to managing the risks in the pension scheme. You have no way of forecasting when it will be a 20 degrees (C), perfect, sunny day for hedging the real yield.

The best economists, asset managers and investment consultants have tried and spectacularly failed to predict “the right time” to hedge against this most pernicious and insidious of risks.

That’s why every newspaper is headlining “Pensions Massively Underfunded as Liabilities Soar.” What they should be screaming is: “Pensions Massively Underfunded as Unhedged Liabilities Soar Due to Systemic Failure to Implement a 20 Mile March Strategy.”

There is only one effective approach: The 20 Mile March. Hedge a bit of your risk every month until it is all hedged. No pension scheme that has taken this approach at any point in the last 10 years now regrets it. Not one.

Since Dec 2, 2003, when Friends Provident Pension Scheme hedged its risk, many others have embarked on their own 20 Mile March (vis-à-vis hedging risk, diversifying assets, achieving target funding levels) and are now sipping a dry Martini on the verandah of the highly rated Bayview Hotel, Bar Harbor, Maine.

If you are still huddled in a snowbound cave somewhere in the Colorado mountains waiting for sunny blue skies, chances are you didn’t have a 20 Mile March Game Plan.

It’s (probably) not too late.

Tomorrow, whatever the weather, do 20 Miles.

Waleed and the Accounting Standards Board

Here’s a blog I wrote on 17 October 2005. Even then, the writing was on the wall:

Last Friday, I had occasion to spend an afternoon in Frankfurt and after my meeting I hailed a passing cab. “I need to get to the airport sharpish, bitte,” I said to the driver. “Kein Problem!”, he replied, “Mein Name ist Waleed und ich komme aus Afghanistan” before achieving the doubly impressive feat of driving at 200kph whilst simultaneously chatting to his father on his mobile phone.

In fact, it took less time for Waleed to drive from the centre of the city to the airport than it did for me to get through customs and security. These days, Frankfurt Main’s security is seriously tight - you walk through a metal detector, your belt and shoes get X-rayed, then they scan you with a handheld device and finally they pat you down in a decidedly Teutonic, no-nonsense, kind of way.

A hundred yards further on and they do the whole thing again. Some might say this level of scrutiny is a serious inconvenience. And at one level they’d be right. By the time you’ve jumped through all the hoops, you stand every chance of missing your flight. But on balance, most people would rather jump hoops than have the wrong guys slip on board the flight with them.

And so to the Accounting Standards Board’s announcement last week that it is carefully considering whether FRS 17 needs to be adjusted in any way. The reason seems to be that the ASB realises how incredibly important FRS 17 has become and wants to be sure this exacting accounting standard is neither too stringent nor too lax.

But the ASB is giving little away and the industry is desperate to know which way it’s going to lean. No doubt some are hoping FRS 17 will be consigned to the dustbin - it’s the CFO’s equivalent of Frankfurt security and very inconvenient; first you get X-rayed as you discount your pension liabilities using a bond yield and apply a true market level for long term inflation.

Then, as if that’s not enough, the Pensions Regulator pats you down and if he finds any spare cash, firmly suggests you put it into the pension scheme.

Several companies are finding that the unrelenting scrutiny is delaying their strategic plans. If your scheme has got a big deficit, then before you IPO, buy back shares or sell off assets, you need to think about the pensions regulator, because he’s watching.

With some companies missing their flights, they’re fervently praying the ASB will scrap the 17th financial reporting standard. Don’t bet on it. Mark to market is now the global norm and besides, for trustees, FRS17 and the the pensions regulator are the two best things that have happened - because they have encouraged corporate sponsors to hedge risk and start making material additional contributions to the scheme.

You see, despite FTSE’s storming rise in the last couple of years (faster than Waleed on his way to the airport), the deficit has still got bigger.

And it’s only at the FRS 17 X-ray machine that it shows up.

Four Attributes of Pension Trustees Who Take Decisive Action

At 11:00 on a freezing morning - 2 December 2003 - Friends Provident Pension Scheme took decisive action.

The scheme implemented a landmark hedging transaction fully protecting itself against falling interest rates and rising inflation.

They were the first pension scheme to do so, and they set in train the multi-billion hedging transactions that have since become commonplace and are known generically as Liability Driven Investing or LDI.

It was the culmination of months of discussion and planning. Even so, the fledgling inflation swaps market was extremely thin coming up to Christmas and this was a very long dated and large derivatives transaction. In fact, back then, it was the largest of its type to date.

I was working alongside my favourite trader, Jon Mitchell (Merrill Lynch’s Head of Inflation), Rob Gardner (now Co-CEO at Redington) and legendary ALM guru, Philip Rose. For us, it was like landing a 747 on the Hudson.

For Friends Provident Pension Scheme, there was no precedent for a pensions-hedging transaction of this size or type and, at the time, it flew directly in the face of conventional wisdom.

Nonetheless, exactly eight years later to the day, the transaction has proved far more effective than any of us involved with it would have believed possible. The 30 year real yield on 2 December 2003 was 2.13%; these days it is below 0%.

That utter collapse of the real yield (i.e. a sharp fall in interest rates AND an equally sharp rise in inflation expectations) should have cost the pension scheme around £213 million in increased liabilities; but it hasn’t. Why not? Because against all the odds, it hedged that very risk.

Many much larger pension schemes still haven’t hedged. In some cases that failure to take decisive action over the last eight years has added billions to the liabilities.

Why is it that some pension schemes consistently take effective, decisive action, whilst others do not?

Here are FOUR key characteristics of pension scheme trustees who DO consistently take effective, decisive action:

1. They examine the Hard Evidence and act on it - regardless of Conventional Wisdom.
The first time I presented to Paul Cooper (Friends Provident’s in-house actuary) the proposal to de-risk the entire £600 million pension scheme, there were two simple numbers we discussed for over an hour. Just two numbers.

The first was the amount by which Friends Provident Pension Scheme’s liabilities would increase given a micro (0.01%) fall in interest rates. That number was just over £1 million. Imagine that for a second. Interest rates move around in the traded capital markets all the time; and the tiniest of tiny moves jacked up the liabilities by a million quid!

What’s more, this implied that a one percent fall in interest rates would ratchet up the pensions bill by more than £100 million. No-one was predicting a one percent decline in long term interest rates, but that wasn’t the point. If it happened, the pension liabilities would rise by an insanely large amount.

The second number we discussed in meticulous detail was the amount by which the pension liabilities would increase for every micro (0.01%) rise in inflation expectations. This number was also circa £1 million. Which meant that a one percent rise in inflation expectations would drive up the pensions bill by just under £100 million.

The nightmare scenario in my presentation was a world in which interest rates FELL by 1% AND inflation ROSE by 1%. The pension plan would take a combined hit of £200m!

But the chance of interest rates declining with inflation simultaneously rising was non-existent. Colonel Gaddafi had more chance of becoming the Pope. At least, that’s what Conventional Wisdom said. Conventional Wisdom back in the day reasoned that if inflation rose, the Bank of England would inevitably raise interest rates to bring it back down. It would be automatic, a sure thing. Guaranteed. Newtonian physics.

A world in which interest rates could fall by 1% and inflation could simultaneously rise by 1% was the stuff of pure fantasy. This was one of the first things one learned at the LSE. To suggest otherwise, just showed you knew very little about Economics.

An hour into our discussion, Paul and I both agreed that if interest rates fell and inflation rose it would be an unmitigated disaster for the pension scheme. There were simply no equity-like assets that could offset that kind of damage. What we just could not agree on was how likely that scenario was to materialise.

So we went back to the evidence.

We were on the sixth floor of the Merrill Lynch offices in King Edward Street overlooking Paternoster Square. The table was strewn with empty coffee cups. All the water bottles were empty; fizzy and still.

Persuade me”, Paul said. “You have my undivided attention.” (I had written an article for Finance Magazine saying that unhedged liabilities were the elephant in the room but, in order to be convinced, Paul demanded more evidence than I had yet presented).

I made three arguments:

Argument One: Over the previous 100 years, the real yield had been down to zero on several occasions. Indeed, the “normal” levels of 3 or 4% (and the floor of 2%) so readily quoted by Conventional Wisdom were the outliers, the exception, NOT the norm. We had experienced zero percent real yields in the past and we would likely see them again. I had 100 years of data and the 100 year graph.

Argument Two: The risk of materially lower real yields was a risk the pension scheme JUST COULD NOT AFFORD TO TAKE! If Conventional Wisdom was wrong, the entire pension scheme would be in jeopardy. And, crucially, in 2003, a hedge was relatively affordable. Why wouldn’t you??

Argument Three: A new era of transparency (post Enron / Tyco / Worldcom) had ushered in sweeping changes to global regulation and accounting rules. Pension schemes were suddenly forced to mark their liabilities to market and report them as a debt, squatting like a giant toad on the sponsoring corporate’s balance sheet. No exceptions.

It seemed reasonable to infer that this development would inevitably spur ALL companies to compel, at all costs, their defined benefit pension schemes to manage the volatility of the pension deficit. Which, in turn, would mean that demand for gilts and swaps (as hedging instruments) would soar. In the absence of massive increased gilt supply, the price of gilts would rise in the coming years, and would keep rising.

And if (as seemed plausible, even probable) the government decided to take the same uncompromising “mark to market" approach to its vast unfunded public sector pension liabilities, that would have an incredible impact on the price of gilts (upwards) and their yield (downwards).

That, in turn, would cause all defined benefit pension liabilities to sky rocket to infinity and beyond, since pension liabilities increase at warp speed as yields fall.

If the Land of Mordor (aka Negative Real Yields) did materialise, then failure to hedge, I argued, would prove catastrophic. Maybe not for several years, but eventually it would prove fatal.

We went over it and over it. Again and again. Paul was wrestling with the fact that no-one else shared this view, no other pension scheme had done such a transaction and last, but not least, he would need to persuade an entire board of trustees (and the Board of the corporate) of some seriously unconventional wisdom. It was a huge ask.

We had been talking for the entire afternoon. Finally, he leant back in his chair. “OK. I get it, I buy it, I’m going to make it happen.”

And he did.

Paul Cooper is an intriguing guy. He’s softly spoken, completely bald, highly intelligent, he has an acute, dry sense of humour and a gift for getting to the point.

He doesn’t tire of interrogating the evidence and calmly persisting until, Columbo-like, he gets a satisfactory answer. He is also an actuary with years of experience dealing with banks, asset managers, advisers and trustees. Back in 2003, he was almost uniquely qualified to guide the pension scheme through the labrynth of capital markets, derivatives and pension maths necessary to “make it happen”.

2. They have advisers who think Outside the Box and understand the Big Picture
In 2003, I was an investment banker, not an adviser. This was a problem. As I pitched my apocalyptic world view of negative real yields and soaring liabilities I (mostly) met staunch resistance. Adviser after adviser argued that hedging against a falling real yield was a complete waste of time and, more importantly, money. If any hedges were to be implemented, it was to protect against falling equities, not the real yield.

But it turned out that Friends Provident were advised by Towers Perrin, a firm who were willing to be persuaded of the benefits of hedging against a falling real yield.

Mark Duke and Steve Bonner, two of Towers Perrin’s leading consultants, picked up the ball and ran with it. Without them, it would never have happened. I could cite 50 pension schemes who considered hedging in that year, but simply could not get their investment consultant to sign off on the strategy. Too expensive. Misconceived. Irrelevant. Too complicated. Wrong level. And so on. In that year, I heard them all.

3. They have an effective governance structure that allows the trustee board to make key decisions and implement them rapidly
One of the fundamental flaws inherent in the board structure of the traditional pension scheme is that decisions are typically made by committee; much like a jury. This can easily lead to stalemate and paralysis.

Another, is that it meets too infrequently to allow sufficient time for proper discussion. A typical board meeting may have up to ten items on the agenda, six of which are major topics each worthy of a day’s debate.

Yet another, is that The Decision often requires a level of expertise that many trustee boards do not possess. In my experience, if you don’t have a couple of investment committee members who really know their capital markets kung fu, you’re much less likely to be able to respond to the swirling fog and changing landscape. You might get lucky and make the right call, but that’s hardly the same thing.

Going into 2012, with the level of uncertainty and market volatility we are facing, every pension plan should be ramping up the level of in-house expertise. Every trustee should be devouring daily, real-time market intel and quizzing market experts. Just as the flight crew pores over data before and during the voyage. They don’t wait until they’re in the ice storm 30,000 feet over the Atlantic before they come up with a game plan.

One long-serving pension trustee whom I know well, recently resigned from the board because, in his words, “I’m not the right person for this job. I don’t have the skill set.” That was an incredibly courageous step to take, and it was the right one.

He has now been replaced by someone with 20 years of battle hardened experience in the capital markets. Someone who has spent the last 20 years assimilating complex data and making fast decisions in fast markets. That pension scheme’s governance level just rose sharply and the switch will undoubtedly save them a lot of time and money in the years to come.

4. They are never lulled into a false sense of security
Just because there are monthly board meetings doesn’t mean “it’s all in hand”. It just means there are monthly board meetings. Unless EVERY board meeting is spent looking at current market data, analysing current pension plan data, weighing current expert opinion and taking specific pre-planned actions as a consequence, those board meetings are not much more than an alternative way to spend a Thursday in nice company.

Pension schemes that today find themselves fully hedged, owning lots of valuable gilts and well diversified growth assets aren’t in that position due to blind chance. They didn’t just get lucky. They did the difficult maths, counted the number of days left before the scheme starts to eat itself, fired some managers, hired others, scenario-stressed their assets and liabilities, looked at the PV01 mismatch between their assets and liabilities, calculated their negative convexity and risk, asked their consultant hard questions, assumed there would be an ice-storm and then took decisive, rapid action.

The Take Away
Pension plans that have not hedged are now in a very difficult place. In these market conditions, there are very few choices and no luxuries. But for some, it’s not too late. There are hard decisions to be made in the short time remaining.

For example, there is a valuable illiquidity premium to be achieved from certain asset classes and there is still a disciplined hedging program to be implemented (YES!) even at these levels. The iceberg looms large against the night sky, but implementing the principles above may help avoid a full-on collision.

Maybe. I read in Financial News that several hedge funds are starting to short those companies whose pension plans have not hedged. The killer predators have done the maths (it’s not hard) and worked out that, for some, it is already too late. The deficit contributions bill that will be presented to the corporate sponsor some time in the next 12 to 24 months is likely to be so large, it will ultimately wipe out the entire corporate group…

Mallowstreet: Two Years On!

Exactly two years ago we launched Mallowstreet.

Here’s the blog I wrote a few weeks later:


“If a man can write a better book, preach a better sermon or make a better mousetrap than his neighbour, though he build his house in the woods, the world will make a beaten path to his door…”
Ralph Waldo Emerson
Well, we finally delivered the mousetrap and the world is beginning to beat a path to our door; the one in the middle of the woods at the north-east corner of the City and on the border of edgy Shoreditch. Yes, after seven months of painstaking development, mallowstreet went live at 20:00 on 23rd November 2009.

We named it mallowstreetbecause that’s our address and we kind of like the fact that whilst no-one knows it yet, pretty soon they will.

We created mallowstreet because the more we talked to people, the more it seemed like a good idea. To be honest, it’s not like everyone was telling us to go build a digital social platform, but enough people said they didn’t feel connected to other people whom they thought could be important to them.

Others said they didn’t have enough access to good products and services. Some people said they were being asked to deal with complex issues they didn’t really understand. And still others said they were pensions lawyers who didn’t know a single asset manager and didn’t really understand the inner workings of asset backed securities although they were being asked to express legal opinions on them.

Some people told us they worked in a Pensions Solutions Group at a bank, but had zero direct access to pension trustees, so weren’t sure if they were on the right track.

And a lot of pension fund trustees said they felt too reliant on a single consultant, that they didn’t know many other trustees or pension fund managers, and that despite their best efforts, they felt they were fighting a losing battle as the funding level inexorably declined.

At the exact same time, we watched as 370 million people joined a website called Facebook and 60 million people signed on to another online platform called LinkedIn. The web, we realized, brings like minded people together.

We were also intrigued by the subtle, powerful influence of a website like Amazon. I mean, last Christmas, millions of people didn’t bother going to the shops; they just ordered their stuff online and it arrived the next day ready to be wrapped and put directly under the tree.

And that’s not all. Oh no. Amazon sorts things and it does it on a scale that is frankly incredible. Amazon catalogues literally (ho, ho) millions of books and it will find the one you are looking for in the blink of an eye. Amazon will also tell you what the crowd really thinks of your book and what else the crowd thinks you should read. If you liked that, you’ll love this…”

We checked out TripAdvisor. Same idea. Just hotels, not books. The web, we recognized, sorts and sifts vast amounts of information, quickly and very, very, efficiently.

Then, as we got stuck for answers and used Google, we thought long and hard about the power of a website that comes up with an answer to your question almost as quickly as you can type it. What is Tiger Woods’ real name? What is the population of Bali? Who is the oldest person in the world right now?

Eldrick Tont, 3,156,912 and Gertrude Baines. Just like that.

A while ago my Apple Mac froze and, try as I might, I couldn’t eject a DVD. The pair of tweezers I brought to bear just snapped off bits of plastic. So I went online, threw out the question into a forum on Macs and a guy in San Francisco said to press down on the mouse pad for 8 seconds and then hit the Eject button. It worked.

The web, we understood, answers your questions. Even the most niche and obscure. And there are lots of world class experts “out there” with answers to the pension industry’s many questions.
Earlier this year we signed up to Twitter and witnessed the greatest paradox of all. A system of online communication that limits you to only 140 characters, becomes the most powerful communication tool of all time. It almost brings down the Iranian government.

Some Twitterers have more than a million “followers”. It introduces a level of connectivity and dialogue that makes all previous connections pale into insignificance. If you’re not on Twitter, you will think I’m over-egging it. If you are, you won’t. Now, we appreciated that the web turns everything into a conversation.

Meanwhile, YouTube, the video sharing website set up in 2005 by Chad Hurley and Steve Chen, established itself as an online phenomenon. 24 hours of video footage is added every minute – the equivalent of Hollywood churning out 150,000 blockbuster movies every week.

Every day, a few minutes of footage “goes viral”. Ghyslain Raza inadvisedly videoed himself waving a metal pole and pretending it was a light sabre. His mate uploaded it to YouTube and it has been viewed more than 21 million times. Someone even made this enhancement to it. Ghyslain has since moved State and changed his name. It is a timeless reminder of the power of the web.

Or take Susan Boyle’s astonishing debut on Britain’s Got Talent, one of the most viewed video clips in history. 81 million online hits confirm it as four minutes of utterly compelling video as the sniggering pre-conceptions of the entire studio and watching television audience are turned upside down. A paradigm shift if ever there was.
We took away three major lessons. First, the Lesson of Ghyslain: Never, ever, video yourself doing something you wouldn’t want everyone else to see. Second, it is now technologically dead easy to create a highly watchable video clip. Third, you can convey a huge amount of information in 3 minutes.

It dawned on us that the web allows anyone, anywhere to broadcast sophisticated, high quality, news and information.

So we got together and asked ourselves “What if?” questions. What if all the like-minded people in the pensions industry could be brought together in one place?

That would include anyone with something to say or offer to pension funds: asset managers, banks, investment consultants, actuaries, law firms, accountancy practices, custodians, administrators etc. It would also include all pension plan trustees, pension managers, corporate senior executives…
What if we provided a place where they could contribute their wisdom, experience, knowledge, humour, whatever and we could sift and sort it like Amazon does? If the crowd could rate everything – tell you what it likes and what it doesn’t – that would be immensely powerful.
What if trustees in particular, but everyone in general, could ask complex questions and get simple answers? That could be truly empowering. I was talking to a trustee a few weeks ago who confessed that after three years of trying he still really didn’t understand what a Total Return Swap was.

What if he could throw that question out onto the street and get back several answers? One might be a video from an expert at a bank. Another might be an article from an asset manager or a contribution in a forum. Or a succinctly written blog. He could choose the best ones, tag them, link them and then tell other people. Soon you would have the best material on the site at the click of your mouse.
We were inspired by Jeff Bezos, the self effacing guy who started Amazon in his bedroom. When he started in 1994 with four others, they tripped the circuit breakers when they tried to run their PC at the same time as a vacuum cleaner because they had so many orange electrical cables plugged in around the house. Now Amazon is one of the world’s most successful companies. Everything is possible.

Well, mallowstreet is growing quickly and as with all digital platforms it’s doing things its creators didn’t anticipate: An inflation swaps trader at a bank messages a trustee at a pension plan: “I cycled L’Etape last year and this year I’m doing Land’s End to John O’Groats. I see you just did both. Let’s grab a coffee. Whenever works for you.” The trustee writes back: “Love to. I’m in Canary Wharf next Tuesday. Does that suit?”

“Sure.” Says the inflation swaps trader. “I’ll meet you at Starbucks and afterwards why don’t you come in and I’ll take you round the trading floor and show you how we construct and execute an inflation swap.”

And there you have it. They’re talking to each other, not as a major financial institution to a large defined benefit pension fund, but as two guys with a similar all-consuming passion. And it leads to a pension fund trustee spending a very useful morning on one of the City’s premier swap desks. That’s a whole new thing. Those conversations are kicking off across mallowstreet and, slowly but surely, like-minded people are connecting.

The community includes pension fund trustees, pension managers and secretaries, corporate sponsors, actuaries, investment consultants, asset managers, investment bankers, lawyers and various industry experts.

Already there are 72 (today: 1,800+) blogs or thought pieces across a wide piste and including inflation, pension deficit funding, social media for pension funds, funding level indices and the Pensions Regulator. Plus much more.

From the pension plan trustee who tracks aircraft, to the actuary who is an expert in Ikebana, to the fixed income world-class tri-athlete, there is, trust me, something for everyone. And we’ve only been on air for three weeks. Cowabunga!

If You can see the dreams of Men and Women

Click on this blog I wrote six years ago.

Funny old world.

Invent the Recipe for Coke - Then Post It Online!

Back in the day, I worked for Merrill Lynch. Their business model was simple. Find out what your clients want and deliver a better solution than anyone else.


This was fine as far as it went. The problem arose when another bank discovered your Secret Transaction and marketed it to all your clients. This is an investment banker’s nightmare. You work for a year on a clever transaction and someone else snaffles the idea.


Thus, every banker is obsessed with “proprietary transactions” and would sooner be photographed naked with a Rastafarian on Clapham Common at midnight, than disclose the solemn, sacred, secrets of The Transaction.


So you can imagine my surprise when I came across the guys at RiskMetrics back in 2006 with their devil may care approach to secret transactions. Not for them the cloak and dagger performances I had been used to during my banking career. Oh no! These guys weren’t just indifferent to discovery of their cunning inventions, they positively courted attention.


I was incredulous. Surely that’s IP suicide? I suggested.


"Not at all", they said, “We publish ALL our thoughts and discoveries. On the world wide web. Always have done.”


“And we do it for three reasons:


“First, we want everyone to associate us with cleverness and state of the art innovation. We want people to read our secret recipes and think “Now That’s Genius!”


“Second, we’re usually one step ahead of the crowd. By the time they’ve figured out how to put the ingredients together, we’re onto the next thing.


“Third, we want our ideas propagated around the globe. There’s nothing better than having everyone make Coke the way you do. Or more specifically, use your algorithm to calculate risk. How cool is that??”


It made sense. So that’s why, now, we publish all our ideas on our website. Everything. All the Secret Sauces in every flavour. We hope everyone takes our stuff and makes it their own.


And as a principle for operating in social media space, there’s no better mantra. Stick your Killer IP online, give it out for free, add value to the community and your (and your firm’s) social equity will soar.

Well, do ya, punk?!

I know what you’re thinking. Did it fall six points or only five? Well to tell you the truth in all this excitement I’ve kinda lost track myself. But being as this is the Real Yield Twenty Eleven, the most powerful destroyer of pension plans in the world, and will blow your head clean off, you’ve got to ask yourself one question:

Do I feel lucky?

Well, do ya, punk!?

Dirty Harry (sort of)
There are a lot of things it’s OK to feel lucky about.

·       That the sun will keep shining brightly in a sky-blue sky and you won’t need your umbrella. If you’re wrong, it’s not the end of the world. You can nip into a shop and buy one.

·       That the Boeing 747 you’re about to board won’t fall out of the sky, mid-flight. Whilst it’s counter-intuitive that something so massive and made of metal will ever leave the ground, let alone land you in New York 8 hours later, there’s plenty of hard evidence to support your lucky feeling.

·       That you can safely walk down Piccadilly without being set upon by a pack of wild dogs. It’s theoretically possible, but it didn’t happen on any of the previous 109 occasions, so it probably won’t today

There are a lot of things NOT worth feeling lucky about:

·       Feeling lucky leaving your purse in your shopping trolley parked near the Fruit and Veg in Aisle 3, whilst you casually stroll around the store. Unless it’s Waitrose, obviously.

·       Feeling lucky about driving at 110 m.p.h. at midnight in the rain with your headlights turned off.

·       Feeling lucky about long term interest rates soon rising and long term inflation soon falling.

Sometimes, all the evidence says it’s OK to feel lucky.

Sometimes, it doesn’t matter if you’re wrong.

Sometimes, that’s not the case.

Is it Time to De-Risk The Pension Plan Yet?

As the European economy looks increasingly likely to derail, and with a plethora of unknown Unknowns ahead, it occurs to me that this is precisely why you take out insurance.

You don’t pay your premiums to the nice guys at Chubb because you fully expect your house to burn down. No, you cough up every year, because it might burn down. Because stuff happens. Because, in the dead of night, under some hidden floorboard, a mouse might gnaw through an electric cable and set the place ablaze. Someone might leave a burning candle too close to a curtain and forget to blow it out before you go to bed after a great dinner party and plenty of decent Chilean Rioja.

Because things just happen.

That’s also why you de-risk (or “hedge”) the pension plan if you’re a Plan Trustee. The three biggest risks (by a country mile) are, and always have been, the risk of inflation rising, the risk of long term interest rates falling and the risk of the corporate sponsor not being able to pay the bill if the assets run out.

Many pension plans have taken a long-term, large and consistent bet that none of these risks would materialise. No mice, no candles. Yes, they have had plenty of time to insure - Friends Provident Pension Scheme read up on this stuff and fully insured (hedged) on 2 December, 2003.

Lots of others have hedged since then. But some pension plans always found a reason not to.

Now, as the mice start to gnaw furiously and the curtains catch fire, there is some serious pain being taken across the pensions industry.The curent deficit numbers aren’t in the public domain yet, but when they are, it’s going to be much worse than anyone expects. The biggest, unhedged pension plans are in the most trouble. Think Titanic, think iceberg. 

If the metaphors aren’t working, let me spell it out.

Inflation expectations are way higher than the pundits predicted they should, could or would be at this point in the economic cycle. Some say it makes no sense. Well, that’s why you insure.

Interest rates are insanely low and aren’t about to start rising. It’s looking like a Japanese Winter. How can be that be, when inflation is on the up? It’s counter-intuitive.

That’s why you insure.

Corporate sponsors now find themselves unable to “write the cheque”. I’ve lost count of the number of Finance Directors who confidently informed me in 2003: “We’re making so much money, we could write a cheque this afternoon and just rub out our pension plan’s deficit.” “So why don’t you?” I always asked. “Because we’ve got better things to do with our money." they usually said.

Eight years on, and with an unexpectedly brutal time in front and behind, the chirpy, dismissive confidence has evaporated, replaced by nervous, darting glances.

That’s why you take out insurance.

If your Plan’s adviser is still giving you the same tired old reasons to wait for the “inevitable mean reversion" to higher interest rates, lower inflation and sunlit uplands, just shut your eyes, take a deep breath. and imagine an elderly, confused gentleman huddled with his wife in a small freezing room because they don’t have enough money to pay the heating bills.

That’s what happens in a world where the pension plan runs out of money because the assets never did catch up with the liabilities, and the company never did write the cheque, and the insurance / hedge never did pay out.

Because. right to the bitter end, the Pension Plan Trustees always believed there was going to be a better time to de-risk.

Joe Frazier RIP

Ali comes out to meet Frazier, but Frazier starts to retreat.
If Joe back up an inch farther, he’ll wind up in a ringside seat.
Ali swings with his left. Ali swings with his right.
Just look at the kid carry the fight.

Frazier keeps backin’, but there’s not enough room.
It’s only a matter of time before Ali lowers the boom.
Ali swings with his right. What a beautiful swing.
But the punch lifts Frazier clean out of the ring.

Frazier still rising, and the referee wears a frown
'cause he can't start countin' till Frazier comes down.
Frazier’s disappeared from view. The crowd is getting frantic.
But our radar stations done picked him up.
He’s somewheres over the Atlantic.

Now, who would’ve thought, when they came to the fight,
They was gonna witness the launching of a black satellite?
But don’t wait for that fight. It ain’t never gonna happen.
The onliest thing you can do is wonder and imagine.

Mohammed Ali