Clock not Container
How the metaphors of movement and storage obscure the temporal architecture of finance
We frequently misunderstand finance because of the metaphors we use to describe it. These are often spatial in nature, for example embodying the idea that capital moves and that pension funds in turn are containers into which money flows and from which it is later withdrawn.
I’ve been thinking about this while trying to understand the relationship between pension funds and the assets they hold, especially in the context of infrastructure investment. Some of the commentary around this topic implies there is a giant pool of capital waiting to be used that can fund infrastructure without raising taxes.
For example:
And:
These metaphors are not innocent as they shape policy discussions that result in real decisions. As the excerpts above suggest, talk about ‘unlocking’ pension capital, creates an image of money waiting idly (“underutilised”) in a reservoir, rather than recognising that what is at stake is the timing of obligations and claims.
I recently tried sketching a diagram of those supposed flows and it served to reveal my own conflation of actions and durations.
Digging into this a bit, it made me think about underlying metaphors. Consider the common conception of a pension fund as a ‘container’ of capital. Contributions go ‘in’, investment purchases see capital go ‘out’, investment returns ‘to’ the fund go ‘in’, pensions in payment go ‘out’ and so on. It’s a deeply spatial conception. The pension fund is understood as a place that capital can enter and leave.
To be clear, I’m not talking about capital either as productive asset or social relation, but as a symbolic store of value. My focus is on how such records are re-timed and reassigned, not on the ownership or control structures that generate them.
So, considering the ‘pension fund as container’ metaphor, let’s start with something trivial but conceptually disorienting. Capital doesn’t ‘move’. It is both obviously true that capital doesn’t literally move and feels quite difficult to comprehend, because it forces us to abandon the easier to grasp image of money physically flowing. Ultimately I think this is because of the misleading metaphors we use to try and understand the relations at play.
Rather than a container in space, think of a pension fund as actually a nexus or co-ordination point in time. This description is functional, rather than physical. A fund isn’t a thing located in space but a framework for aligning obligations and entitlements whose timing differs. Temporal coordination is enacted through valuation models and accounting systems rather than through any physical flow of capital between locations.
Being clear about time rather than space applies both to the fund and how it invests. Contributions to pensions are typically monetary (cash) and derived from wages. These are units of account storing the value of a previous exchange – in this case the provision of labour in return for payment. These stored units are then transformed into future flows of value, structured to provide the beneficiary with income, again at defined temporal intervals.
Within the pension fund temporal nexus there are actually different types of flow, depending on asset class.
When acquiring bonds, for example, units of stored value are exchanged for a tightly structured temporal sequence of returns. The issuer gains liquidity and is therefore able to utilise value immediately, converting future claims into present use. In turn, the lender relinquishes liquidity in exchange for a larger, time-distributed claim.
When acquiring equities, units of stored value are exchanged not for a defined temporal sequence of returns, but for participation in an ongoing corporate process. The investor’s claim is potentially indefinite, dependent on the firm’s continued existence and capacity to generate future value.
Unlike a bond, which securitises a bounded interval of time, an equity securitises continuity. It is exposure to the possibility that the issuer and the income it generates will endure. The investor’s liquidity depends not on repayment, but on the belief that others will, at some different point in time, value the same continuity.
As an aside, with corporate issuers the company is potentially immortal and can take different forms through time. Company leadership and workforce can turn over entirely during the period in which the pension fund owns equity. The nature of the business can change as can its geographic footprint. As I wrote a couple of years ago, it is a corporate Ship of Theseus.
To take another asset class, and to return to my entry point, when pension funds are investing in infrastructure, units of stored value are exchanged for claims on the future use of material (real) assets. Infrastructure returns derive from the continued functionality of physical systems such as roads, airports and energy networks over long durations.
Here, the temporal claim is tethered to persisting physical things. The investor exchanges liquidity for participation in a stream of value generated by the asset’s operation through time such as the payments of tolls, rents or other service charges. Infrastructure investment therefore fuses two temporal orders: the material time of physical endurance and maintenance, and the contractual structuring of time undertaken by finance. The act of investment converts the slow unfolding of use and deterioration into a sequence of monetary flows.
Derivatives take us even further into temporal games. When entering into derivatives, units of stored value are exchanged not for ownership or participation in an underlying process, but for claims contingent on future states of value itself. A derivative represents a contract on change across time. Its worth depends not on the production or persistence of value, but on how value will vary between now and a specified point in the future. Derivatives could be thought of as temporal ‘echoes’ of the assets they reference. They respond to movements in the underlying, but one step removed.
Like bonds, derivatives have a clear temporal structure. But whereas a bond defines a fixed sequence of payments a derivative contract has meaning (and value) only in relation to possible futures. Its temporal claim is contingent. The investor exchanges liquidity for the right (or obligation) to gain or lose value depending on how another price, rate, index, whatever moves.
Derivatives repeat, amplify and bring into the open the recursive structure of financial time, in which today’s values depend on expectations about tomorrow’s expectations. It is a fractal-like temporal structure repeating the expectations logic of finance.
As an aside, the UK’s recent experience with Liability-Driven Investment (LDI) illustrated how fragile temporal engineering can become. Pension funds had used derivatives to build a notional exposure to long-dated stability. But when gilt yields rose sharply, the recursive character of financial time revealed itself. Instruments designed to hedge long-term liabilities demanded immediate liquidity, forcing the premature realisation of future claims. What appeared to be prudent temporal alignment became, under stress, temporal compression. The future was pulled violently into the present. The biggest shockwaves in finance occur when time catches up with itself.
Through these various instruments finance makes different temporal relationships tradable.
Returning to the pension fund, pensions themselves are a temporal sequence of provision of units of value. These are bound by the lifetime of beneficiaries and thus undetermined but can be forecast with some degree of confidence. The pension fund is not a ‘container’ of capital. It is a temporal nexus in which claims extending into the future and obligations reaching back from it are continually aligned and re-valued.
Within the pension fund, structured and and more open temporal forms coexist and interact. Bonds provide predictable, finite streams of value that can be matched against near-term and actuarially forecast obligations. Equities, by contrast, represent indefinite participation in ongoing productive processes whose returns cannot be scheduled but may extend far beyond any individual liability.
The fund’s function is to synchronise these distinct timelines, using the stability of bounded instruments to offset the uncertainty of open-ended ones, and to translate the indefinite continuity of corporate participation into the finite flows required by beneficiaries. In this sense, the fund operates as a mechanism for converting quite varied temporal claims into a coherent schedule of payments. Rather than a container, a pension fund is a clock. It is an institution that mediates between the time of financial markets and the time of human lives.