Thank you, sir.
I would like to introduce myself. I am rather old--I am approaching 84 now--and fairly literate and numerate. These days I am an observer of the pension plan business. At one time I used to be the treasurer of a company, and for seven years I was deeply involved in pension management of a mid-sized pension fund.
For the last 20 years or so I have been receiving a pension from that same pension fund, and I have some perspectives about some government policies that have affected the fortunes of the pension industry simply by an often ignored means. I'll outline that to you in a couple of moments.
Pension fund management is a business that is essentially a liability-driven business. You employ a person, especially if he is a young man of 25 or 30, and you provide for a liability that you will pay after 40 years. He will work for you until about age 65, and then as the lifespan is expanding, you will probably keep on paying him after he retires. At one time it was for seven years. When I retired, you were expected to get your pension for about 10 years or so. Now I am virtually 84, and I have been enjoying my pension for the last 20 years. If I live long enough, I will have enjoyed a pension for about 25 to 30 years.
For us, managing that business then was a very ticklish problem. We ran after first-quartile performance. We ran after all kinds of standards that we tried to apply to results, but as I went through the logic of the pension business, I realized that it was a very dynamic situation in which we had to manage assets and liabilities in a very transparent way.
Liabilities were created first, and we had to manage them through the next 50 or 60 years by managing our assets in terms of cash flow, in terms of maturity, in terms of matching, and in terms of all kinds of little things that we had to worry about in relation to our assets. Our investment strategy at that time, in the 1980s, was gradually being developed away from mere equity performance standards and the standards you've heard about from different experts so far and towards the management of a liability-and-asset relationship.
Unfortunately, during the last 10 years this important function of pension management came under a virtual shock, simply because of the central bank's policies of reducing interest rates in the market. This policy started after 9/11 and the recession that came in. The banks started slashing interest and creating cash flows in the market. After the disaster of 2007 and 2008, they brought the interest rates down to virtually nil. We had 0% interest rates.
You may have heard the stories of people in the U.S. paying money to keep their deposits with the treasury free of interest for some time, an absolute reversal of the position. What that did to pensions was virtually shut off the question of the relation between fixed investment and equity investment, which is obviously more risky in this declining marketplace.
Because interest rates were down so badly, it also indirectly caused an increase in the present value of the pension liabilities.