I wrote a blog post on Wednesday called 'Where's the debt?' and another yesterday called 'That hit a nerve'. I have to say I am returning to the theme, precisely because both received so much negative reaction from those who are obviously financial market insiders who have not been slow to hurl abuse as a result.
The blogs had related themes. The first suggested that I was surprised that pension funds have now largely abandoned gilts and have moved towards investment in much riskier corporate bonds, about which many very informed commentators have considerable concern, as Marco Fante noted.
The second, noted the near hysterical reaction and added this comment:
And I do not claim to be a market expert: I just use my sense to work out there is very real risk based on a) systemic issues b) experience c) knowledge of economic modelling and d) risk aversion that I think pension funds should share. This also means that I very, very much doubt that the risk has been priced appropriately.
Despite this, those commenting seem to think I claim to be a market expert. Their ability to read is seriously in doubt, it has to be said.
I also noted that I use heuristic logic and that:
And if you want to know what that heuristic says right now, the actual answer is hold cash, even though you will lose in the short term.
Despite this, I was accused of being completely dedicated to gilts. Again, this just shows an incapacity to read. It also happens to be wrong since my own pensions are quite big on cash at present. But why let what I say get in the way?
What I did realise was that I did have quite a lot more to say on this issue, so extreme is the commentary that has been offered by those who have posted from the so-called investment management profession. My comments have three themes. Firstly, I discuss my investment logic. Second, I suggest that this logic actually has some merit to it, despite what the investment managers say. And third, I consider why they have got quite so hysterical, and what factors can underpin what I think to be their quite illogical conclusions.
So, to turn to my investment logic, I think it only fair to note at the outset that I am a Quaker. I do not make a big deal about this. But, it does mean that I have an aversion to gambling. And because like most Quakers I do not have a particularly materialistic outlook, and seek to live what I would like to think is a relatively simple lifestyle, then I am probably not in conventional terms an income maximiser, and am entirely happy about it. This probably also suits my own risk aversion. I accept this is real, unless I am investing in my own activities, where I appear to have completely different traits. Finally, and perhaps most significantly, the Quaker quest for truth means that I am unwilling to turn a blind eye to the consequence of actions. So, for example I have a fairly long list of things that I would not be happy investing in, and in general I'm fairly unhappy about investment in anything that is heavily dependent upon advertising to generate an excess return for the benefit of a few at a cost to many. So, whilst I'm not at all opposed to the existence of markets, very many large companies that operate on the basis of quasi-monopolistic, and almost certainly oligopolistic, power undertake activity which I find fairly alien to my own ethical principles. I ask no one else to subscribe to my views, but I see no reason why I should be criticised for having them.
What I would suggest is that there are likely to be more people who are interested in this type of use of their investment funds than the pension industry and other sectors reflect. It is a complete scandal that the vast majority of members of pension funds have not the slightest idea where their funds are reallyinvested and that the law does not require them to be told, or require that they be positively consulted on a regular and informed basis. Nor are they ever asked how their pension fund manager should seek to engage with those companies in which they are invested. The idea that we have a shareholder democracy based upon this complete removal of the rights of those for whom pension fund, and other investment managers, actually act is a travesty of natural justice and is one of the themes that I hope the Corporate Accountability Network can address over time. Nothing less than a revolution is required in this area.
Now I admit that it does so happens that this personal investment profile that I have does incline me to think that investment in government securities is a benefit even if I do not make an immediate or obvious return as a result. I am well aware MMT appears to argue otherwise in some situations, but the fact that my savings can help support socially beneficial activity by investing in a government savings mechanism does seem to me to matter: the simple fact is that the vast majority of what the state does appears to me to be of much greater value to society than much of what large companies do. I am willing to pay a price to engage in a socially useful activity. Investment managers who do not realise that there is a connection between the return that they make and the activity that generates it have, in my opinion, utterly failed in their duty.
They will, no doubt disagree. And I have no doubt that many will mention the term ‘ fiduciary duty' whilst forgetting that in practice this has now been completely redefined so that an investment manager is not obliged to maximise return at whatever the social cost of doing so. That was the case and it no longer is.
I may take what some might think to be an extreme view on this issue, but I can also say with considerable confidence that the vast majority of those who are offering opinion on this blog at present do represent the polar opposite extreme. And I think their views ones that I find very hard to accept. Their apparent belief that if ‘the model says yes', where the model is based solely on a quantitative analysis, then ‘they say yes' happens to undermine any role whatsoever they might have in their employment, because they can be entirely replaced by artificial intelligence. I also do hope (without much expectation) that it leaves them with little sleep at night.
I do then seek to make good returns, but in ways that these managers clearly cannot comprehend. This is, then my second point. My logic makes complete sense when taken as a whole. It does not to fund managers solely because they are viewing one small part of the equation (which they then reduce to an equation) in isolation, and that is a substantial error on their part, which explains all too well why so much of the UK pension industry so grossly fails those who are forced to participate in it, frequently against every judgement that they would exercise on their own part. And this is why, although I am happy for people to be encouraged to save, enforced enrolment in pension schemes that require, for example, investment in the types of funds that these people manage is to me wholly unacceptable, and most especially when those managers are almost entirely unaccountable for their actions.
So let me move to my third point. Why is it that the fund managers can apparently act in this ethical void where all that matters is a quantitative return wholly divorced from its real-life social, economic, ethical other consequences? And how is it that these managers, from their consistent comments made, appears so utterly indifferent to the risks that informed commentators right across the media recognise exist?
The answer on investment management culture is easy to provide: this is, of course, the logic of the undergraduate economics degree, and the whole logic of the business school. Neither teaches students to have any real relationship with the world and they instead base almost all their teaching upon the learning of quantitative methods. A lot of research has shown that this has deeply unsavoury consequences on the mindsets of those who participate in such degrees, and I am sure that this is perpetuated in their subsequent employment in the types of activity that those who have commented here undertake.
However, there is something else much more significant to consider as well. That mindset was revealed by those who said it made no sense to invest in gilts when cash provided a better return and was also guaranteed by the government at the level which many individuals might hold. That's the clue: what these people have entirely removed from their consideration is the possibility of a risk of real loss i.e. of failure. And that is because as a result of 2008 they believe that any loss that arises as a result of their poor decision-making will, effectively, and always be underpinned by a government guarantee or backstop. This is available to banks, who are too big to fail; it is available for many cash deposits and, of course, it is inherent in the pension bailout arrangements that are now in widespread use. There is not a shadow of a doubt that a government would have to underpin this if there were really catastrophic failures. These investment managers are suffering what might be best described as extreme moral hazard. The upside of any decision they make is all there is to take in their opinion, whilst the downside will always eventually belong to someone else, and in the last resort to the government. There is a capitalist upside for them in their logic, and a socialist downside and I suggest that this deeply implicit assumption is one that has become so commonplace that they are either unaware of it, or refuse to acknowledge it.
So what can and should be done to deal with this situation?
First, the decision as to how any pension fund should be invested for any pension fund member should belong to the member in question. Yes, I know they are collective: but it is simply unacceptable that funds should not now be accountable to those in whose interests they are run. So a member should have the right to be ethical, and risk-averse, and have that view respected, even if it means that they might on occasion appear to have a lower return as a result.
Second, the days when pension funds do not prepare accounts to send to the people that they represent, detailing precisely what their activities are, in what they're invested, what their churn might be; what the risk profile of their investments is, and how they have incurred costs on the member's behalf, should be consigned to history. We need to radically transform pension accounting and make fund managers responsible for what they do, which is the last thing that they are present. This form of accounting should be extended to all who invest their own retirement directly with a company. It is scandalous that the information provided on such important returns is so poor.
And third, pension funds must have their own version of a living will. If banks need these then so too do pension funds. The possibility of being dependent upon bailout should be seen as the absolute last resort: the obligation of the company to meet its liabilities as they fall due should be paramount, and if it cannot be met then a charge over the equity in issue of the company that has promoted the scheme should be put in place: no shareholder of that concern should be able to extract value until the obligation to the members has been met.
Yes, I know that this might reduce apparent pension returns. But let's be quite clear, these are hopelessly over-inflated right now as a consequence of QE and any informed fund manager should know that and be taking action to mitigate that risk. But it is apparent that they are not. And that is precisely because they do not think that they have to, which is what a living will arrangement would change: these would tackle head on the issue of moral hazard.
I am well aware that these suggestions are radical. I also stress they are in outline only: the truth is that they deserve a much more thorough treatment but this was written in an hour or so. But they exist independent of my own investment preferences: they are required so that all can assess their well-being in this most crucial of areas where at present pension fund managers can extract considerable reward for usually failing to even match the market and yet claim their actions are wholly rational.
I am bored by such abuse. And what I suggest would tackle it.
Are those reforms possible? Of course they are. Are they relatively straightforward? I'd suggest that they are. But will they be resisted tooth and nail? I guarantee it. And I can tell you why. The fund managers will lose the right to abuse by extracting rents from pension fund members that are scandalously high in the UK. And that has to stop.
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Richard
The reason you think ‘you hit a nerve’ was that your blog was full of inaccuracies and some people think it’s important for the truth to come out.
Having repeatedly pretended that people have said that corporate bonds have no risk (despite being corrected on this), it’s a bit rich for you to claim that other people can’t read.
Secondly, you appear to be making a claim that pension funds have ‘largely abandoned gilts’ based on the confused claims by one person, not directly involved in pension fund management. That doesn’t appear to be particularly firm grounds for such a claim, particularly when some simple googling would have provided you with articles showing how pension schemes were massive buyers of government bonds as recently as 2016.
https://www.ftadviser.com/pensions/2017/03/17/pension-funds-piled-31bn-into-gilts-last-year/
Unless you have an article showing massive sales of gilts by pension funds in 2017/18?
The rest of your mail is a rant about managers that appears to understand very little about who directs the investment strategy for pensions – for DC it is the members themselves, for DB it is the trustees who represent the members, NOT the investment managers.
Finally, when implementing the decisions made by the members and their representatives, it is the managers who assess the risks of different assets within the realm of assets they are permitted to invest in.
Which comes back to the point about corporate bonds – if these are being held to maturity, to back lisbilities, then the relevant risk assessment is whether the spread you are being paid is sufficient to offset the expected loss due to defaults. As someone else has highlighted, you could every future year with the same level of defaults as occurred in 2008 and still be better off than holding gilts.
And you have the arrogance to suggest that other people don’t understand risk. It really is priceless.
Tracey
I really think you need to find something else to do with your time
You’re not winning here
Richard
Angela says:
“The reason you think ‘you hit a nerve’ was that your blog was full of inaccuracies and some people think it’s important for the truth to come out”
I say no: “some people” doth protest too much. That was blatantly obvious and their overreaction sat in perfect parallel with the Google “corporate debt level” search results that were so remarkable.
Forgive the cliche but this is clearly a hot button issue right now.
‘And you have the arrogance to suggest that other people don’t understand risk.’
Honestly Tracey, this is rubbish. How dare you?
If you ever listen to Radio 4’s Money Box programme nearly every week it seems to be reporting on some problem with some investment fund somewhere. And it is usually talking to the poor investor who has now lost much of their wealth.
These people who have been denuded of their money have felt that they have tried to be aware of the risks and usually report that they have been constantly reassured by the investment agent that everything is OK. But to no avail.
The issue that you seem to ignore, is that risk it is not necessarily located in the investment itself but is located in the poor management of the funds. Even Tom Watson (a bona fide industrialist) in his 2017 book ‘Tragedy & Challenge’ notes that many fund managers fail to understand the economic realities their portfolios work in and create unrealistic expectations that they sell to the investor. Investments are treated like property is at the moment – the assumption is that the valuation will keep rising. In fact the so called ‘management’ of the portfolio is just down right laziness based on these assumptions.
The real risk in investment matters that I think should be highlighted therefore is that there seems to be a declining interest and concern amongst far too many investment houses in the concept of ‘fiduciary duty’.
Their main concern is more short term and concerns fat fees and bonuses for the portfolio ‘manager’ and the house.
Not all investment houses are bad, but far too many seem to be. So, if I was going to talk to a potential investor about risk, I’d talk about the investment ‘industry’ first. Not the investment (maybe second). I would attempt to steer them away from it to be honest because it also seems that in the management of risk, you need to have first class and INDEPENDENT intelligence on the investment houses performance and their standards.
Tell me Tracey – given the poor performance of the ratings agencies in the lead up to and even post 2008, where would those who wish to manage and appraise risk get quality information from to inform their decisions?
Or what about that shambles known nationally as ‘Companies House’?
For me, the bottom line problem in financial investments remains the asymmetry of information between the investor and the agent (as pointed out long ago by Stiglitz): investment decisions are no different to you buying a used car, but only the seller knows how bad or good the car actually is but will make the sale nevertheless. And it is the buyer has to live with the consequences.
Managing risk Tracy? Sure. The best way? Not in the traditional modes of investment you seem to advocate. It is time for better system and one where the Government can step into more with bonds and a National Investment Bank. The greedy markets have had their fill. It is time they went on a diet.
Tracey does not understand the asymmetry of risk – all of it stacked in her favour
Well said.
I think many of the reactions I have seen here recently are redolent of those in the private pension sector who benefit from having their noses deep in the trough of the current system or practice.
Our whole system of pension provision (is it a system!!?) is FUBAR as far as I am concerned and unsustainable because it is seen as an income and profit stream by those running it – not a service – just like the railways, utilities etc., are treated these days.
Here is a short tale of what I just seen in my life.
I have been helping to wind up the affairs recently of an elderly relative who is now in care with dementia. Throughout her life she read the Guardian, voted Labour and worked diligently in public service (education).
Yet, there I was a couple of months ago shredding documents/account ledgers from her off shore investment accounts where she had deposited money.
Out of interest I took a look at some of these and I was struck by one thing: the charges being levied by the offshore companies on these monies. They were not inconsiderable when added up over the years. But I thought – if you are going to be charged fees, then what is the difference then in paying tax? It’s still a cost to the person depositing the sums. Both the fees and tax destroy the value of the money deposited.
And for me, the most socially useful to pay is the tax.
Maybe my relative took this course of action because she did not think her pension was good enough? Other than that, out of respect I do not wish to consider her actions further. But I know what I have seen from a behavioural point of view is telling us something about how people try to manage their wealth in retirement and is worthy of further reflection.
I mention it here because maybe the reform of pensions (and the tax system) might enable people to steer away from offshore because using offshore of course just perpetuates it? Maybe they can make more socially useful choices?
Whatever we do, there needs to be a better contract or understanding between the pension holder and provider.
I find the drawing away of the State from pension provision deeply worrying when they also seem to be propping up the private pension sector with money that could very well be supporting direct and sufficient pension provision.
For much of the 20th century pensions and other insurance funds were managed on a ‘mutual fund’ basis, and they operated quietly, but were highly regarded by the public; the payment of the fund managers was not itself a notable wealth creating enterprise. This is what we have lost, through the Thatcher financial “reforms” of the 1980s, and into the 1990s. This loss of the principle of mutual fund management was almost unnoticed at the time, and remains so. I have always considered that the effect of this apparent embrace of the dynamics of short-term financial return was profound, permanent and as a systrem of managing very long term personal investment, catastrophic. No sysytem has no weaknesses, but the weakness of the model we now have, means the we have had to invent very clumsy and expensive (and potentially ‘bottomless’) public resources to cover the problems we have created. Vast sums of public money are required to be thrown at the failures of the system, whenever they arise; which is often.
‘This is Money’ reported this on 5 December, 2017: “Failed pension schemes were propped up with a record £661million by the industry lifeboat last year, with successful small companies footing a huge chunk of the bill. The Pension Protection Fund steps in to save schemes when they are facing collapse, meaning savers do not lose everything.In the 12 months to March 31, it doled out £661.3million to 129,661 pensioners — up from £1.4million a decade ago when the PPF launched.”
But haven;t you noticed people here saying there is no problem?
Very good points, John
I was once, long ago, employed by a company that was (among other things) employed by a mutual funds to answer the fund members’ telephone enquiries about what sort of a deal they would get under the proposed de-mutualisations of the funds.
I knew that this was iffy at the time and at odds with my own philosophy but it was a job and it was going to be there with or without my approval. For many of us the attitude back then was different. I remember this one weird woman that used to visit from a certain fund and ask us surprise, random questions to make sure that we knew our subject. At one point she asked me what a ‘deferred annuity’ was and I told her that it was an annuity that had all of its fur removed.
Some of us just got by making light of what seemed like yet another boring, dodgy assignment. Later on the fun turned a bit sour, however as it eventually became apparent that the members usually got a shit deal and reputable, long-established mutual societies had been ruined.
In retrospect with all that has happened since then I just look back on that job, shake my head and put it down to experience. I also think that, looking forward, the mutual society is a model that could be revived, for some purposes, as an alternative to the corporation.
EDITOR NOTE
I tried to find an argument in this post that was not a gratuitous ad hominem attack
Nothing of any substance was not
So its content has been deleted
You really should try arguing, it would help your case
Some of this sort of regulation and accountability might reasonably have been expected to have been included when the Thatcherites opened up the personal pensions market in the eighties, instead of throwing us all to the wolves.
Dear Richard, OK, well you have redeemed things to a large extent with this full and proper explanation of your position. It is, as you acknowledge, a very personal philosophy and as you also note it is a bit extreme compared to the median position. I can agree with much of what you say, but I will come to that shortly.
To be clear: my job is map making. I am not and never have been in the Financial Services industry and nor do I have a relative or friend who is. I also live 400 miles from London, support the SNP and take a dim view of most of the finance professionals. I have said since I was 20 that the principal activity of the City of London is to separate the punters from their cash in as efficient and speedy a way as possible.
Firstly, ‘there is a crash coming soon’ is not a prediction. It is simply a statement of capitalist fact that is always true at all times. When I think of the last 30 years there has been the Japanese Property Crash, the Black Friday Wall Street / London Crash, the ERM Sterling Crash, the post-Soviet Crash, the Third World Debt crash, the US Savings & Loan Crash, the Tech Bubble Crash, the UK Property Crash (twice – 1990 and 2008), the SE Asia Developing Markets Crash, the Argentina Default Crash (twice – I think buying Argentinian Gilts is like playing a slot machine – you know you are going to lose your money, it is just a matter of how long it takes), the US Junk Bond Crash, the 2008 US Housing / Derivatives Crash, the Greek / Euro Debt / Bank Crash, etc. That is at least 15 and no doubt a few more so lets say a Crash every 18 months. So if you are going to make a prediction you will have to be much more precise about what crash you expect, where, when and why.
You haven’t explicitly said so, but you seem to be talking exclusively about UK company pension schemes and what you seem to be expecting is a crash in (largely) UK Corporate Bonds, and probably by implication also UK shares. What about the other 99% of humanity? Personally I think a crash on Wall Street and in some US Corporate Bonds (primarily those of Hedge Funds, Private ‘Equity’, and other financial companies) is much more likely. The US indices are at historically high levels, the FTSE 100 is essentially unchanged from the late 1990s level, the US has had a strong recovery from 2008, the UK has failed totally to recover.
Secondly, of course I would support many of your reforms. People should know what happens with their Defined Contribution pension fund and have control over the investments. If you want yours in cash and gilts that is up to you, but I would not expect a large pension! 🙂 In the case of Defined Benefit pension schemes it is a bit different. This is not your pension fund – it is the Employers promise to you. How the employer funds it is really up to the employer and the obligation to pay the promised pension does not go away even if Armageddon reduced the Fund Value to nil. So in this case it is not reasonable to impose your investment ideas on the Employer. If you don’t like what they do then you should take the funds / contributions and ask to have them into your own Self Invested Pension or a Defined Contribution scheme instead. It would be totally unreasonable to insist that a Defined Benefit scheme follow your particular wishes, even though that might result in low or no returns, and then still require the Employer to make up the shortfall to deliver their promise. You can by all means tighten the law to stop companies trying to ditch Defined Benefit schemes, but this is already largely only possible by putting the company into Administration or Liquidation. British Airways has been described as a Pension Scheme with a small airline attached. I am sure if there was a way to ditch their Final Salary pension promise they would have found it. What is undeniable is that the various changes already made (the Brown Dividend Tax Credit, extra regulation, de-risking, low returns, etc) means that nobody in future generations in the UK will have a Final Salary pension. So you won’t have to worry about what it is invested in as it simply won’t exist.
Thirdly, you still don’t seem to get it about either Gilts or Corporate Bonds. They are not all equal. Some companies are more trustworthy than others. That has nothing to do with rating agencies, which I have never used or looked at and probably never will. This is an area where your Quaker principles should be at the fore. When Cadbury was still Cadbury why would you not have been happy to have a Cadbury Corporate Bond in your portfolio? By all means give the likes of Glencore a wide berth. In terms of Gilts then an Argentinian Gilt has a very different risk profile (and interest rate) to a UK one. Within a country are you talking about short, medium or long? If you want as little risk as possible you should opt for short dated gilts (say max two years), as the market price will never differ by much from the face value. If you go for Long Dated UK gilts you are taking a big risk as I said yesterday. Some of them won’t be repaid until 2060 or beyond. So you could find yourself locked in the for the rest of your life. You dismissed it, but I don’t think the Brexit run on the pound / emergency interest rate increase scenario is unrealistic. You said ‘Why would they put up rates if it means Gilts slump?’ to which I would say because they have done it almost every time before since 1914 when there was a sterling exchange rate crisis. Ever since the BoE / State let the Glasgow Shipping Bank collapse in the 1870s the interests of the City have taken priority over the real economy. A sudden 20% fall in Sterling directly affects the value of all the hot money in London, the value of all those foreign owned office blocks and penthouses, etc. Those people have no interest in your gilts or what happens to those in our pension funds. Besides without the inflows it becomes impossible to cover the huge Balance of Payments deficit rUK runs and there really would be a full blown crisis.
Fourthly, your proposals are not nearly radical enough. The obvious, safest, most efficient, cheapest way to provide pensions is via a Universal State Pension provided by the Government at a level that is good enough for the Median salary earner to manage comfortably in retirement. As indeed happens in e.g. Germany (Bismark being the first to have introduced a State Pension in the 1890s). The UK system of a bare minimum that forces everyone either into the clutches of the City or poverty in old age is not fair or sensible.
I am a great admirer of your work on Tax, Accountancy, etc, bought your book, etc so please spend a bit of time to properly read the above. Some of your replies to other folk over the last couple of days have been rather towards the flippant which is a disappointment to me.
If you want a suggestion for another area where your skills would be very well applied then look at Insolvency. That really is a license to steal. My old company was liquidated, very small and simple case and took about 40 hours for which they charged £32,000 which was strangely just equal to the funds collected. So nil for any creditor. Another friend had a bigger German company (still small – maybe a couple of million Euro a year turnover) and when he got into trouble the liquidators charged €900,000, again curiously just equal to the funds collected from selling the assets.
It strikes me that “radical reform of pension fund management” is actually quite modest in ambition even compared to your previous proposals Richard, regarding pension funds, investment and their role in the economy…your “Making Pensions Work” paper for example.
I am just an “ordinary Joe” but my experience in life, and common sense, tells me that our current system is a crazy way to provide incomes for the population in retirement. I was a member-elected pension scheme trustee for 10 years before I took early retirement and at the end of that period of office I had concluded that the current pension system we have is completely broken. Only the state can play the vital role in pension provision — instead we rely on a vast and growing casino to do the job; a casino that is failing us and which is also grossly distorting our economy.
Much of the debate that has ensued in response to “Where is the debt?” seems to me to be an argument about the best ways to win or lose in the casino. I would argue that the best way for us all to win is to shrink the casino down to a more manageable size. To do that requires an end to pouring mountains of cash into feeding the monster (Varoufakis’s “Minotaur”?). Deficit funding of final salary schemes is just helping feed the beast and closing them down and forcing workers into defined contribution schemes just moves the feed on to a different conveyor.
In short, my suggested solution is to transfer, over time, every pension scheme into a kind of sovereign wealth fund (I have called it a “National Investment & Pension Fund” — NIPF) which would provide investment capital to support useful and productive activity in return for a share of the revenue streams that this activity generates. Cash inflows to the fund would come from ongoing employer and employee contributions as well as these investment returns. Companies would no longer face the burden of deficit financing — that risk would be collectivised and underwritten by the state…..which, as you have consistently argued, has the sole capacity to create money.
No doubt such ideas will attract howls of derision from those who have a vested interest in continuing the casino. However I would hope that others with a more detached perspective might like to explore the idea further. I am more than happy to share more details of the proposal for a NIPF with anyone interested in new ideas.
Interesting
Very, very interesting. And well worth considering.
My pension fund (which used to be a final salary pension but which changed into an average final pension scheme without my consent) is in the red.
Why? Because many local authorities took the Tory pension contribution holiday to save money when Central Government grants were under funded when the Tories were in power previously. I only found this out when I put in an FOI request on the source of my pension fund’s deficit.
Our entire work force is being told that getting the hole in the pension fund filled is paramount so that is why we must watch costs and accept below inflation wage rises.
I know that in a comparative sense I am lucky to have a pension – but then I’ve sacrificed my wages into it too – kept my part of the bargain so to speak and it is also what was in my original contract which to be honest has just been ripped up basically when they changed it form a final to average pension.
We used to be able to put in voluntary contributions but now we are not allowed to. We have put those in (you’ve guessed it) a private provider. So much for choice! It’s seems a deliberate ploy to keep the LA pension short of funds and provide rich pickings for the many greedy pigs who run private pensions.
So yes, I agree with others here that a system focused on delivery of pensions (a State system or SWF type) to me is better than a ‘for profit’ system.
I would like to see a State funded scheme, perhaps linked to a decent State Pension. But the first question will be “How are you going to pay for it?” and the first clinching dismissal of the whole idea will be that in x years time there will only be 2 tax payers for every 4 retirees (or something) so there will be too little tax to fund it. These arguments were made after the crash about public sector pensions.
I am not advocating a state funded pension system Graham. My proposal involves creating a national fund – a sort of sovereign wealth fund – by a process of amalgamation of all existing separate occupational pension funds. This process would have to be undertaken by the state but the resulting fund would not be paid get its money from the state. It would potentially have a value around £2tr …bigger than Norway’s oil fund. The state would be funder of last resort should there be any unlikely occasion where the fund could not meet pension payment obligations….the state can underwrite the fund since it has the capacity to create money, a capacity that has been fully explained by Richard.
All I can say Graham is that this blog is peppered with good ideas that answer those challenges. It would be nice to see them adopted.
And we all know that tax doe not – cannot – pay for everything – since we spend first and tax later. So the answer is that the money has to printed. Or it could be a debt – a bond. Or both.
@Jim Osborne. I realise you are advocating something else, (which, of course, might have the same kind of problems as highlighted in these blogs), but if the State is to be funder of last resort why not make it funder of first resort? It’s time we looked at what the State owes its citizens as part of a decent social contract/compact – I think a decent retirement is one of these obligations.
@EAS I was trying to point out that the current othordoxy will undoubtedly raise these issues about any State scheme, because they are entrenched in neoliberalism and either don’t understand or wilfully misunderstand.
Given the huge inbuilt moral hazard you rightly outline, what would you say if a system that allowed private accounts to be held at the Bank of England–holding either cash deposits or government bonds (green incestnebt bonds?)–and then seeking to remove explicitly the to big to fail guarantees. Then people would know when their money was at risk and be freely able to avoid the risk? Prevent vicious advertising from the financiers and I reckon people would prefer the security of this new system.
Itvslundsceasy
Who makes the loans though?
That’s how a lot of money is made still, after all
Loans can be made from money that has been deposited with the risk fully acknowledged. These people bear the risk and expect some return about the safe rate. Effectively people buy shares in an investment trust.
And of course, money is made too when the government spends in line with maintaining full employment, under this model as under the status quo (if they understood what fiscal policy was for anyway)
I have to say, as an explanation for risk that is mighty opaque
What are you saying?
Should there be an element of risk attached to a pension scheme at all?
To accept risk seems too accepting of current market norms and their problems to me.
Playing around with pension funds is in my mind just not on. Look what happened to those funds that invested in CDOs etc., in the 2008 crash and who ended up taking the likes of Goldman Sachs to court after losing millions.
I think that reform needs to deal with the risk issue.