Pension Funds and the U.K. Economy

The paper considers the impact of U.K. defined benefit (DB) pension plan unding and investment on the U.K. economy. It suggests that many conventional theories are based on incomplete or inconsistent economics. In particular, the author suggests that:• An economy cannot really gain competitive advantage from high returns on the domestic assets in which pension funds invest.• DB liabilities are essentially similar for most schemes and can be closely matched with bonds.• Funding pension liabilities has no primary impact on individuals’ consumption and saving or on firms’ capital investment.• Pension funds are not natural investors in the equity of new ventures.The conclusion of the paper is that the most significant impact of pension funds on the U.K. economy relates to the costs imposed by extreme mismatching between their financial assets and liabilities. The author argues that such risks can, in essence, “crowd out” entrepreneurial risk. He asserts that the U.K. economy would gain from greater focus on the matching of these assets and liabilities, and that the best way to stimulate enterprise is by eliminating the frictional costs in the economy arising from current practices.