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.

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.

Schrödinger’s Real Yield

The More Things Change, The More They Stay The Same.

Here’s a blog I wrote on 4 July 2005.
UK Real Yield (1.39%) 4 July 2005 

Independence Day and it’s very quiet in the in the inflation and interest rate markets, affording some respite after last week’s rally, the real yield closing up today at 1.39%. Frankly, there’s not much else to say so, instead, here’s some quantum physics, as it applies to the real yield.

In 1935, Ervin Schrödinger came up with an intriguing experiment. Stick a cat in a box with a radioactive time bomb and a vial of hydrochloric acid and close the lid. After one hour, due to conditions in the box (which are either good or bad –we don’t know if the bomb has gone off until we look) the cat will be either alive or dead or both (the Psi equation allows for this possibility). But, and here’s the rub, by simply lifting the lid to find out, we disturb the experiment and affect the result. If the cat lives or dies it does so because we peeked. And that, dear reader, is quantum physics in a nutshell.

One wonders whether Schrödinger’s Cat process is at work in the world of interest rates and inflation. Eighteen months ago, the real yield was at 2.17% (December 2003, since you ask). Practically no one knew or cared. Trustee meetings came and went - the performance of FTSE and the state of the bond markets were extensively discussed – but the real yield (on the 2% 2035 index linked gilt) wasn’t even on the agenda. Pension funds owned homeopathic amounts of it – so why worry about the yield?  Thus, for the most part, it got shut in a box, the lid only lifted once every three years – which obviously wasn’t enough to do any harm.

But accounting standards boards, regulators and rating agencies have changed all that. Now the lid is well and truly open, with CFO’s, Treasurers, Consultants, Actuaries, Asset Managers and Trustees all looking into Schrödinger’s box with a growing sense of disbelief. The real yield is in a sorry state – coated, you might say, in radioactive hydrochloric acid. And the more everyone looks, the further it seems to fall - as if the very act of observing, somehow affects the outcome. Schrödinger would be proud.