Dr Philippa ‘Pippa’ Malmgren is a familiar face on British current affairs programmes like Newsnight, not just because she moves in the highest government circles around the world, but because her plain speaking is a refreshing challenge to the politically or self-interestedly motivated speech we so often hear from ‘talking heads’. Dr Malmgren “tells it as she sees it”, as she is proud to claim, because she put things in plain English – something to attributes to the great economist Sir John Hicks under whom she studied at the London School of Economics (LSE) in the 1980s. As a PhD student at LSE she was exposed not just to Hicks but to the extremes of the Right (Alan Watkins) and Left (Lord Desai) in the world of economics, and her tutor was Susan Strange, a leading advocate of the need to study economics and politics in an integrated way. If you want to explain the story you have to see both sides and “tear down the interdisciplinary fences”. You also need an international perspective – not least to comprehend your own country, which you can’t do until you leave it.
Politics and business
Dr. Malmgren is an American who grew up in the world of politics in Washington DC and whose father was an adviser to four Presidents. After obtaining her Doctorate she worked in the 1990s in a wide range of positions in a variety of financial institutions in London, Hong Kong and the US. Her employers included Bankers Trust, Deutsche Bank and UBS, for which she was deputy head of global strategy. It was a time of some turmoil in world markets with defaults, and bank and institutional failures. She says that one of her prime roles was to explain the markets to policy makers and policy makers to the markets. She sees this in Star Trek terms – the former group spoke ‘Klingon’ and the latter ‘Federation’ - she speaks both. She also says that many of these failures were predictable but few individuals were prepared to stand up and say “something is wrong here”. Something that was to happen again with the crash of 2007/8. We had learned little from history.
The risks of being too close to the ‘ring’
In 2000 Dr Malmgren was asked to advise the then Presidential Candidate George W Bush on economics matters. When he was elected and took office in 2001 she became a ‘special assistant’ to the President. That year saw seven of the nine largest bankruptcies in American history (including Enron) as well as 9/11. It was a baptism of fire, not just for Bush but especially for his security and economic advisers. One of Dr. Malmgren’s tasks was to assess the economic risks of terrorism for which she used scenario methodology. In the White House she saw one of the risks of ultimate power - that few are prepared to enter the Oval Office and tell the President the truth as they see it. She tells an amusing story about the CEO of a major corporation who had been a strong critic of Bush but became an “obsequious mess” once he entered the office as he was greeted by the President. It’s like Tolkien, she says: “You cannot remain true to yourself if you are too close to the ring”. The Oval Office is a ring!
Good chairmen avoid hubris
Dr Malmgren quotes Peter Drucker to illustrate her point about the hubris at the top. The danger is that “intellectual arrogance is causing disabling ignorance” and the key is the chairman of the corporation - and this applies equally to the chairman of a pension fund. “Do you have the right chairman”, she challenges, “will he or she create a culture where there is active listening to arguments we don’t naturally agree with?” Will he encourage challenges from genuinely independent resources – who are not usually the in-house advisers or paid consultants?
Industrialised countries will default on their debt
After her political adviser term Dr Malmgren returned to London to set up her own advisory consultancy – her clients being financial institutions and governments and civil servants. From her perspective of the global financial world what are the major challenges of today and how might they impact upon the world of pensions? “We are living in a period of history,” she says, “when most of the industrialised countries have massive deficits and I think that they are going to default.” There are four default options:
1. Fail to pay it back (As in Argentina).
2. Pay it back but a bit later and a bit less (Greece) - the so-called ‘haircut’.
3. Default on promises made to your own citizens by deciding that things that ‘used to be free no longer are’. This is ‘austerity’ – as in the UK.
4. Inflation – which has enormous consequences for pension funds and pensioners, along with broader social consequences.
The UK will default through inflation
Dr Malmgren believes that the British government has chosen to go down an inflationary path. “The government is attempting to default through inflation but it doesn’t broadcast this. There is an incentive to ‘low ball’ the inflation numbers and the indices (RPI/CPI) do not reflect the real cost of living rises that people actually feel”, she explains. Rises in the price of high protein foods like beef is only affordable to some, and for those who cannot afford it the cheap calories they consume will be empty calories leading to malnutrition. And this has implications for longevity calculations, which may at present be in the ‘too difficult’ drawer. If inflation is nearer 8 per cent than the published 2 per cent then no wonder, as Dr Malmgren says, “the cost of living will be the number one political issue going into the next election”. And for pensioners receiving CPI or RPI based annual increments there is a clear fall in their standard of living. Asset prices are not in cost of living indices and therefore the rising cost of housing is excluded. Manufacturers feel pressure on margins as input costs rise and there is also increasing wage inflationary pressure.
UK pension funds should invest more innovatively
The implications of the new inflationary environment for pension funds are they may feel they should invest more in government debt. There is also a tendency for government to ‘socialise the losses’ – that is to say place them on the shoulders of savers. And governments may also use ‘moral suasion’ or even legislation to persuade or require funds to invest more in bonds and/or infrastructure. Dr Malmgren believes that pension funds invest too much in ‘non-risky’ things and not enough in asset classes that create growth. She cites two examples – residential accommodation, especially multi-dwelling units, which offer high rental returns, and the small business sector, where most of the jobs are being created but for which few viable investment instruments for pension funds exist. And regarding infrastructure she thinks the “British have a tendency to undervalue infrastructure” whereas some other countries do not. For example it is a Malaysian pension fund which is investing in the Battersea Power Station residential development, not a British one.
Avoiding the ‘Golf Club mentality’
As we have seen, the role of chairman of a pension fund is crucial. Dr Malmgren believes they should encourage study of the changes underway in the world economy and be less constrained by established ways of looking at things and less introspective. They and their trustees should be more prepared to directly listen to those presenting non-traditional investment opportunities. And funds should be more diverse in their portfolios, as the method of management suitable for the disinflationary growth years after the fall of the Berlin Wall is no longer suitable now we have reverted to the old paradigm of higher inflation, more risks and more unpredictability.
Dr Malmgren throws some tough challenges to those at the top in the world of pensions. She thinks all boards should avoid an over-collegiate ‘Golf Club mentality’ because they have a responsibility to a wider public in almost all that they do. Her book, Signals, in which she explores these issues further should be essential reading when it is published later this year.
Paddy Briggs is a former member-nominated trustee of the Shell Contributory Pension Fund