A call for unfunded pensions

Con Keating gave a talk Wednesday in which he called for pensions to be unfunded, but insured.

Key points

  • Pooling is efficient
  • We are definitely rich enough to afford pensions
  • A pension is deferred compensation
  • If pensions are unfunded, then insurance is needed


Individual savings for retirement must be large enough to cover the maximum predicted length of life.

In contrast, pooled savings need only be based on the average predicted length of life.


Allowing pensions to be unfunded might sound shocking, but there are some nice features.

There is an old joke about British Airways being a hedge fund that happens to own a few airplanes.  Except it isn’t really a joke.

Presumably BA knows more about running an airline than asset management — business books often make a big deal about sticking to your core skills.  Funding businesses rather than pensions could arguably provide better allocation of resources.

Con characterized pension regulation as expensive and largely misguided.  That regulation could be mostly dismantled for unfunded pensions.


The down-side of unfunded pensions is that the company might die before the pensioners.  Thus insurance is required.

Con claims that pension insurance is cheaper than asset management fees.

One of the reasons it is cheap is because there are some natural hedges.  Pensions need to worry about inflation and the longevity of the pensioners.  Since the value of the insurance company is based on the premiums from the solvent schemes, that value will go up with inflation and longevity at roughly the same speed as the value of the schemes in default.

With funded pensions it is hard to find someone else to take the other side of the longevity bet.  However, Con seems to think that longevity risk is less severe than often presented (but maybe I’ve misinterpreted him).

So maybe there are theoretical reasons to like it, but is it workable?  Con’s answer is yes: Sweden has been doing it for decades.

Con said that the best insurance scheme would be a mutual.  However, the company that he works for is willing to make some money on it.

More details

Links to the paper along with several quotes from it are at the post: “Don’t stop believing”.

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1 Response to A call for unfunded pensions

  1. Pat says:

    Something that I left out from Con’s argument is that volatilty of the stock market is about an order of magnitude greater than the volatility of corporate profits. So this is another reason for funded pensions to be an expensive route. A plot of FTSE returns and UK company profits are in https://www.portfolioprobe.com/R/blog/ftse_vs_profits.pdf

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