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.