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I founded and co-founded a couple of companies: Redington and mallowstreet; now I have launched a global initiative, Partnership for Change, which is working to improve healthcare, long term care, pensions & savings and technology for a rapidly ageing population. I write about issues of the day that touch me and make me think. Mostly about how to make things better.

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The Death Line

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Tempest. Not in a teacup.

France has unceremoniously kicked out Le President. Greece has unequivocally flipped Chancellor Merkel den vogel. Spain is worth less than Facebook. JP Morgan has just woken up to a US$2 Billion loss it breezily dismissed as a tempest in a teacup a few weeks ago. Equities are about to [cue Daily Mail headline] plummet(so much for the Equity Risk Premium – plenty of risk / no premium). UK gilt real yields are negative (i.e. you paythe government for the privilege of lendingto the government. Che??). The new French President’s plane got hit by lightning (which is what happens when you board a metal aircraft wearing a soaking wet suit in a thunderstorm).
And Dave and Nick’s marriage is on the rocks.

Then
Now

My friends, connect the matrix of dots. The picture is as bleak as it is stark. The stage is set. The Tempest draws nigh. Or maybe not. But probably. One thing is certain: we are staring at a plethora of unknown unknowns. Tail risk abounds.

If ever you felt the need for a vivid, graphic, illustration of why you ought to hedge risk and not rely on a strategy of pious hope, the present difficulties surely provide it in Ultra High Definition.

Let’s talk about risk. You do not insure your house because you believe it will probably burn down sometime this year. Rather, you take out insurance because, in the highly unlikely event that your primary residence is razed to the ground, then, unless you are multi-billionaire Sir Richard Branson and can build it all again, the consequences are unthinkable. Failing to insure your home is, to borrow a concept from the excellent Jim Collins, a Death Line Risk.

 

A Death Line Risk is a risk so great, that, if it materialises, you will face catastrophic disaster. It is nuts to take Death Line Risk, whether you are climbing Everest, riding a motorcycle, running a bank, or managing a pension plan.

Talking of pension plans and Death Line Risks, I am increasingly convinced there are, today, four categories of pension plan:

Those that figured out some time ago they were taking Death Line Risk by not diversifying their assets, not upgrading their governance structure and not de-risking, and did something about it.

Those that talked of doing something about it – but never did.

Those that have just worked it out and are urgently trying to figure out a survival game plan.

Those that still haven’t figured it out.

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