Reckless prudence: financialization in UK pension scheme governance after the crisis

Abstract

In pensions, the practice of valuation purports to answer the question of whether a pension fund has sufficient assets to honor its promises. Uncertainty about the answer is converted into calculable risk, using the insights of financial economics. This article examines why UK pension funds have ‘derisked’ their portfolios by moving out of assets with volatile prices. It is shown that derisking is produced by the performance of financialized risk management in a regulatory setting where horizons are shortened. While derisking is not generally in the interests of employers or scheme members, and is damaging to the wider economy, three features of the governance structure for pensions have stymied attempts to counteract it. These are: the spillover effects of financialization in corporate accounting, herding around industry benchmarks, and collective action problems arising from the regulator’s dependence on dialogue with private actors and from the risk-aversion of political actors.

Keywords:

• Pensions
• financialization
• performativity
• derisking
• valuation
• depoliticization

Acknowledgements

I am grateful to participants in the ECPR Joint Sessions workshop in Mons on ‘Rethinking the Governance of Financial Integration’, panel participants at EUSA Denver, and participants in a workshop at the LSE for their suggestions and encouragement to pursue this topic. Particular thanks are due to Benjamin Braun, Marek Naczyk and Waltraud Schelkle for detailed comments. Thanks also to the anonymous referees and editors of RIPE for constructive comments on earlier versions of this article. I am also grateful to my fellow members of the Joint Expert Panel on the UK Universities Superannuation Scheme, who have over a period of two years in 26 all-day meetings greatly enhanced my understanding of how pension scheme valuation works in the UK. All remaining errors and contentious interpretations are my own responsibility.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 In the US, the term ‘reckless conservatism’ has been used, for example in the context of a Department of Labor campaign to encourage DC investors towards equities and away from low-risk, low-return assets (Langley, 2006, P. 928).

2 Averages over several years are given because allocations have been volatile. OECD data for Finland for this variable are only available from 2004.

Additional information

Notes on contributors

Deborah Mabbett

Deborah Mabbett is Professor of Public Policy in the Department of Politics at Birkbeck, University of London. Her work explores the interfaces between market regulation and social policy. She has published widely in journals including RIPE, Regulation and Governance, West European Politics and Politics and Society.