conference of the Association of Superannuation and Pension Funds

The best summary of Ross Goobey’s position in the mid-1950s is to be found in the verbatim report of his address to the Association of Superannuation & Pension Funds (now National Association of Pension Funds) made in November 1956, which is available to download here. Apart from a minor mishearing by the note-taker, it is quite consistent with the (two) drafts found in the cache of unpublished papers.

By way of background, Ross Goobey was introduced as a member of the ASPF Council and it seems that recently the Association had published a Memorandum on the subject of Pension Fund investments.  In his opening remarks, while disclaiming any intention to give an address, he said:

The object of this meeting is not, as has been suggested to me from some quarters, to give an opportunity to the Association to defend its recent Memorandum on the subject of Pension Fund investments, but you will excuse me if, as one of the principal authors of that Memorandum, I do touch on it, elaborate certain points and, perhaps, you will permit me to make one or two personal amendments or viewpoints which I dare not put in the Memorandum at the time.

The words “defend” and “dare” conjure up the flavour of the controversy that Ross Goobey was (consciously) causing at that time.  At any rate, the argument went as follows, albeit harshly abbreviated.

The rate of interest earned on the fund is the vital thing.  The power of compound interest means that a marginal increase in yield builds up to a substantial extra sum, over the (long) term of the fund.

In calculating the recommended contribution rate, the scheme actuary assumes that the investments will earn a certain rate of interest.  While this is surely the minimum target, the object should be to earn as much as possible.

The traditional view has been that maintaining the capital value of the fund is very desirable.  However, investing in Gilt-edged stocks has sometimes led to a fall in value, e.g. Daltons.  On the other hand, a well-spread portfolio of equities is likely, over the years, to increase in value, particularly if there is inflation.

Pension funds generally are expected to be cash positive for very many years, so there is no need to worry about having to liquidate investments at low points in the market.  We should not be diverted by such outside possibilities, but rely on the probabilities.
Being infants in investment matters, pension fund trustee boards have often been guided by people experienced in investing insurance funds, but adopting the same investment policy is inappropriate for the following reasons:

  1. Insurance contracts are in money terms, whereas pensions are salary-related
  2. The liability term for pension funds is longer.
  3. The Insurance Companies Act leads to scrutiny of solvency on a year to year basis.  Pension funds can ignore market values and take a longer view.
  4. The sheer size of many insurance companies obliges them to invest a large proportion in Gilts, because other markets are limited in capacity.  Pension funds are small enough not to be restrained in this way.
  5. Insurance companies traditionally maintain cash reserves against a possible rash of redemptions.  Pension funds, in practice, do not need to do this.
    Looking at a chart of the last 150 years [not to hand], equities have greatly outshone Gilts, albeit with fluctuations.

Ross Goobey ended by quoting extensively from “one of the well-known Canadian advisers on pensions” (actually Wm M. Mercer, according to the draft) advocacy of pension funds holding “common stocks” because they were a proxy of having a share in the economy and the growth of the country, in parallel with wages and salaries.