Jane Hutton – Interview
horrified by the standards. Maybe the pension funds that I have seen are particularly bad, but given that one of those is very big, it is a worry.
We are talking about the building blocks, the quality of data available, not even about specific formulae to calculate the deficit. A bit like baking a cake but one of the ingredients has gone off, in which case even a good recipe wouldn’t work. Exactly, but that is crucial, it is a mathe- matical fact that errors propagate.
The gilts plus model includes assumptions about future investment returns when cal- culating a scheme’s funding position. Is it possible to make precise forecasts on that basis?
As a medical statistician, I have talked to many parents of children with cancer or cerebral palsy about uncertainties in life expectancy. Yes, it is difficult, but it can be done.
A key point of statistics is to address the question, how do we get good estimates? We need to think about bias and variance. There are methods, there is extensive mathematical theory but among pension schemes and their actuaries there seems to be a happy willingness to ignore it.
Do you have any other issues with how pension deficits are calculated? One of the problems, for example, at local government pension schemes, is that there is a tendency to present an estimated deficit as if it were a single accurate num- ber. Obviously, to make informed deci- sions you first need the best estimate without “a let’s play safe” fudge and then consider several scenarios. You want the best estimate of your cur- rent position and your cash-flows going into the future. Then, to explore “pru- dence”, a word which The Pensions Regu- lator (TPR) likes to use, you could present the different scenarios as a table, based on
different factors. Say, if life expectancy changes by two years, the deficit could change to X.
Instead, there are strikes at universities because of a blunt statement that “the def- icit” is a set number. That is a false state- ment. Instead an estimate of the deficit, with an indication of uncertainty, and explicit statements of all assumptions should be presented. In the financial sec- tor, where they claim to be numerate, they should not be saying that this is a concept that is too difficult to explain to the general public.
The issue is that even with different fore- casts; the scheme needs to come up with a specific value for the deficit contributions. Yes, but decisions about contributions should be fully informed, and take into account the long-term nature of pension cash-flows. Unfortunately, I don’t think TPR wants that quality of information. My impres-
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