The term Golden Age apparently stems from Greek mythology. It refers to the highest age in the Greek spectrum of Iron, Bronze, Silver and Golden ages, or to a time in the beginnings of humanity which was perceived as an ideal state, or utopia, when mankind was pure and immortal. In literary works, the Golden Age usually ends with a devastating event, which brings about the fall of man. So if we use this analogy then the Pensions Golden Age clearly ended in 2000, as the tech boom came to an end and stock markets around the world crashed.

And what is pensions glory? I guess, for most people, pensions glory might be regarded as well funded worked-based, defined benefit (DB) schemes. Certainly few would argue that poorly funded defined contribution schemes (DC), which are now such a common feature of the 21st century landscape, are the glory of the European pensions system. So we have seen Europe's pensions glory, or have we?

Let us look at what has over the last 10 years, a decade that has coincided with the publication of IPE.

As it happened, at start of 1997 life seemed so much simpler. If a pension scheme wanted return, it invested in equities, the more equities the better the return albeit with volatility but pension schemes were long-term investment vehicles so short-term volatility hardly mattered. This was of course taken to the extreme in the UK with the disastrous results so many funds experienced in the first three years of the current decade.

But was it really that simple, was the end of Europe's pensions glory simply down to three bad years of stockmarket performance and the failure to properly implement a balanced and diversified investment strategy before the crash. Here we come to the first yes and no answer.

It has often been said the European Pensions faced the perfect storm in 2000. It was battered by poor stockmarkets, falling interest rates, rising mortality, increased regulation and a decision by the accounting profession to bring pension fund surpluses onto corporate balance sheets. In addition, UK pension schemes faced tax authorities that had decided that pension schemes should contribute towards national coffers. All of these challenges faced corporate pension schemes at roughly the same time! Surely no pension system count survive such shocks?

But was the problem caused by these external events or was Europe and particularly the UK really caught out by some badly thought out investment strategies? It is strange that so few funds really seemed to have appreciated the obvious, as anyone who invests money is taught, almost as a first principle, that the past is a poor guide to the future.

Lulled into a feeling of false security (and good past performance), however, most pension funds continued putting so much faith (and indeed money) into just one asset class - equities and within equities into one sector: tech stocks, Was this simply because they had already performed so well? We all know of value based asset managers who refused to believe in tech stocks and who lost numerous mandates because of poor short-term performance. Indeed even now we continue to
take money away from managers
who have performed badly and give it to managers who have just performed well (and are about to under-perform!). We may be better at analysing the situation and explaining why things have happened but our manager selection skills are hardly any better than they have always been.

However the problem that faced pension funds only a few short years ago hardly lay in poor manager selection. That just exacerbated the problem.

The main cause of the problem was, in the opinion of many commentators (and mostly after the event), was that we had simply forgotten about the relationship between assets and liabilities. For most of the 1980s and 1990s investment management was a skill best performed in isolation of other circumstances. Schemes may have performed asset liability studies but the relationship between asset allocation and liability management was, with honourable exceptions, hardly close.


o life is no longer that simple, but have we gone from one extreme to another? Does the move to liability driven investing mean that we are we now too focused on the short term? Can we no longer afford any volatility? Have we seen the end of long term investing?

Ironically just as we are focusing ever more on the short term, we see organisations such as the Marathon Club springing up, arguing for a long term perspective in equity investing. But does the existence of this pressure group and other groups concerned about environmental issues conflict with liability driven investment?

Not necessarily! In liability driven investing, the challenge starts from finding a benchmark that most closely meets an actual scheme's liability profile. It does not tell you how to invest.

Putting all the new theories into practice has of course proved more difficult than it first appeared. In theory a pension scheme could simply calculate its liabilities and match such liabilities with an optimal bond and swap portfolio which became the Scheme's specific liability benchmark. Schemes could then choose between implementing an asset strategy that tracked the benchmark (for apparently little cost or risk) or tried to beat it by playing the yield curve, switching between bond classes etc or buying other assets such as equities. The key point was simply to know what risk you took by deviating from the matching assets.

Of course we realised that these ‘matching' assets ignored reality such as scheme and membership changes, general demographics and the impact of salary or pension increases inherent in final salary arrangements. However we do now, at least have better tools to set the basis for structuring an investment portfolio.

In the main we have discovered that the structure does not have to be only in bonds, as a decision to invest in other asset classes including, but now not limited to, equities can then be an informed one, where the risks inherent in the chosen investment structure can be more easily measured directly against the liabilities. We can of course also separate a long-term strategy from short term tactics.

So suddenly we have come to a new golden age where pension funds have to be cleverer than ever before. We can no longer go mindlessly into equities hoping that in the long term they will outperform. Now we can be much more scientific about the whole process.

Okay, we have more constraints than we ever realised before but we also have more asset classes and more financial instruments at our disposal. We can find more diversified and uncorrelated assets than before but we have to be ever more vigilant as the nature of discovery changes the future of what we have discovered.


Perhaps the Golden Age is still to come even if the pensions glory of well funded worked-based, defined benefit schemes is temporally under pressure.

There is an old saying: What goes around comes around! So we shouldn't be surprised if in a few years, as longevity concerns recede, the economy continues to grow and deficits disappear, we see the return of the pensions glory but what form it will take is another story!

Trevor Cook is managing director of Specialist Pension Services and director of The European Pension Fund Investment Forum