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So this triggered me to log into my pension fund website. Which I almost never do. My fund's 2018 report says the allocation is as follows: - 37,4% stock - 5

So this triggered me to log into my pension fund website. Which I almost never do. My fund's 2018 report says the allocation is as follows: - 37,4% stock - 50,4% fixed (bonds) - 10% real estate - etc.. (derivatives, cash) The past 2 years the news has also been dominated by the law that governs pension funds in my country. Ever since the ECB cut rates pensions have been cut or been close to it. So it seems we don't allow funds to go riskier, as the article describes. In stead the law forces funds to take their losses now, and not postpone them to a next generation. And during the '08 crisis I remember a talk from a fund manager that said crises don't matter that much for funds. Since they are all focused on the long term the stock will recover anyway and the best thing to do in a crisis is to buy more stock. What funds automatically do since people can't stop contributing. So the key point in the article seems to be this: >"There is one other key reason that public pension funds have transitioned into riskier assets. States have passed laws exempting state government pension plans from the standards that private pension plans are held to. These public pension plans are permitted to use generous assumptions about risk that are not permitted in the private sector. So, while public pensions have moved into objectively riskier assets, they haven’t been forced to account for that risk." So it seems a lack of regulation is the big problem, not economic downturn every now and then.

conanbatt 7y ago
> So it seems a lack of regulation is the big problem, not economic downturn every now and then. Lack of regulation of itself. Maybe the problem is that government shouldn't have people's retirement funds to manage.
- mkr-hn 7y ago
  Who should manage them?
  - kome 7y ago
    they shouldn't invest in the market in the first place. that's what still happens in europe in most of the countries.
    - apexalpha 7y ago
      What should these funds invest in then?
    - yardie 7y ago
      Are we talking private European pensions or the public pensions? I know for a fact my private pension is in the market because they send me an annual report. State pensions is simply government recirculating money. They plug you into a formula and tell you what you'll get at age 65. For some countries it isn't whole lot.
  - cpursley 7y ago
    A mix of whole market low fee index funds with Vanguard or the like.
  - conanbatt 7y ago
    Freely competing organizations that cater to the citizens preferences and demands. The main reason people would choose a public administration of finances is to get the promise that if they fail, some other sucker will pay taxes to cover it.
    - jodrellblank 7y ago
      You mean like happened with the big private finance companies and their massive government bailout, because the private sector loves private profit and some other sucker paying for losses?
      - conanbatt 7y ago
        What is private about government bailouts?
        jodrellblank 7y ago
        What? Private banks and finance companies, for-profit companies. They benefited from not-private, taxpayer-funded government bailouts.
        conanbatt 7y ago
        Government bailouts are not private actions, it's literally a public intervention, contrary to my suggestion of the government not managing people's money.
- TuringNYC 7y ago
  Note that even for private pensions the government is often on the hook, eg via https://www.pbgc.gov https://www.pbgc.gov They do some due diligence, but it isn’t debatable how good the asset liability management is.
- tempguy9999 7y ago
  > Maybe the problem is that government shouldn't have people's retirement funds to manage. True, we shoukd leave it to private industries. https://en.wikipedia.org/wiki/Robert_Maxwell#Aftermath:_Theft_of_pension_funds,_collapse_of_a_publishing_empire https://en.wikipedia.org/wiki/Robert_Maxwell#Aftermath:_Thef... I guess you're american as they seem to doubt government all the time, despite it working in other countries.
- deleted 7y ago
  [deleted]
- bilbo0s 7y ago
  >Maybe the problem is that government shouldn't have people's retirement funds to manage. All pension funds, effectively, have government as, at minimum, the backstop. No way the government would let a large private pension fund fail. (At least, I don't think they would? Maybe I'm being naive?)
  - conanbatt 7y ago
    If its a single fund, like Enron's pension fund, they are toast. If its a chunk big enough like the 2008 crisis, then they swoop in. Remember to bet in things that fail big time!
somebodythere 7y ago
Hmm. Pensions are obligated to deliver a defined benefit in dollar terms, or try their best to do so. In a world where interest rates are being pushed lower every year, pensions are basically forced to move to riskier assets to deliver the same nominal return. (This is, in fact, one of the main points of lower interest rates.) Because pensions are not marketable instruments, it's also not possible for these risks to be priced in. (If a bond had, say, a 50% chance of default, its price on the market would also decrease, pushing up its effective yield. It seems pensions are more of an instrument that is doomed to fail, and expecting them to hold up to their promises is going to lead to a lot of pain for either retirees, or the current and future workers supporting them.
- throw0101a 7y ago
  > Hmm. Pensions are obligated to deliver a defined benefit in dollar terms, or try their best to do so. That is traditionally what most people mean by "pension", but it is DB pensions aren't the only kind. There are also defined contribution (DC) pensions: * https://en.wikipedia.org/wiki/Defined_contribution_plan https://en.wikipedia.org/wiki/Defined_contribution_plan
- mrfredward 7y ago
  In the past, responsibly run pension funds projected a conservative rate of return to account for these risks. The problem isn't the financial model of pensions, but the politics of it. Lowering the expected rate of return of a pension fund causes a huge increase in the funding requirements that are calculated, and a suddenly appearing budget problem such as this is bad news for people's political careers. The same problem exists in the private sector. Changing the model to project a lower rate of return hurts profit numbers in the near term and makes a huge liability appear on the balance sheet, so executives will kick the can down the road as much as they can. The problem is only worse with public sector pensions because of regulatory differences.
  - Kalium 7y ago
    Another wrinkle is that in the private sector, the entity can go bankrupt and that's that. In the public sector, the government entity is almost certainly on the hook forever.
rossdavidh 7y ago
In the U.S., anyway, part of the motivation for states to allow riskier investing, is that the state governments aren't paying money into the pensions funds as they should. Illinois is one of the states which is worst at this; the state legislature has literally broken its own laws (without changing them) by not paying into the state pension funds as it is required to. This has been going on for years, and is more or less shrugged off. So, it's not classical "deregulation" that's the issue, because it's more fundamentally about state governments (in at least some cases) not wanting to raise taxes (or cut other spending) now, so they let pension funds invest in riskier assets to try to make up the difference. Also, the numbers you give show over a third in stocks, which have experienced drops of 50% in living memory. That would seem to be enough to cause a problem even in that case, wouldn't it?
- apexalpha 7y ago
  >Also, the numbers you give show over a third in stocks, which have experienced drops of 50% in living memory. That would seem to be enough to cause a problem even in that case, wouldn't it? I tried to find the 2008 report but the oldest one is 2010. Luckily it has a 5-year-earlier section: https://imgur.com/a/jFUs8bV https://imgur.com/a/jFUs8bV It's Dutch but you can see that they lost 14.5% total in 2008 and then made 14.8% return in 2009 and 10% in 2010. Since they always have fixed income bonds and cash on hand I don't think it's a problem. And in 2018 the fund had €10bn of assets. Seems to be doing great.
- Godel_unicode 7y ago
  > ...which have experienced drops of 50% in living memory. And those drops were immediately followed by a return to previous levels. Pension funds are in it for the long term, and has been mentioned elsewhere in the comments a decade of lower stock prices here or there isn't that big of a deal for them. Being underfunded obviously is an issue, however.
- LorenPechtel 7y ago
  Yup, it's the same problem you always get when you have the same people making the rules as are the ones bit by the rules. It's easier to redefine proper than pay what a proper answer costs. In practice it's almost always government that falls victim to this because in any other case the government is likely to write some rules.
mpalczewski 7y ago
50% in bonds during a time of historically low interest rates is risky as fuck. If those bonds are negatively yielding, then it's just pure corruption. If rates go up, the current value of your bonds drops like a brick. Somehow negative yielding bonds are seen as less risky than holding on to just cash.
- martin_bech 7y ago
  Well thats because bonds are in many cases less risky than holding cash.. in the EU “cash” in a bankaccount is only guaranteed up to 100.000 euro.. bonds are guaranteed for full value in most cases.
  - mpalczewski 7y ago
    That's interesting. In that case cash in a safe would be the better option. You still have negative carry(insurance, rent, security, etc.), not sure how that would compare to the negative yielding bond. Hmm, if enough did this and put it together in some vault and perhaps lent some fractional amount of this money if an appropriate opportunity presented itself you might even make money on this. I just described a working banking system. Makes me wonder how banks could even be solvent in this environment. Are they just regulated into existence. It all sounds like a house of cards at this point.

conanbatt 7y ago

> So it seems a lack of regulation is the big problem, not economic downturn every now and then. Lack of regulation of itself. Maybe the problem is that government shouldn't have people's retirement funds to manage.

mkr-hn 7y ago
Who should manage them?
- kome 7y ago
  they shouldn't invest in the market in the first place. that's what still happens in europe in most of the countries.
  - apexalpha 7y ago
    What should these funds invest in then?
  - yardie 7y ago
    Are we talking private European pensions or the public pensions? I know for a fact my private pension is in the market because they send me an annual report. State pensions is simply government recirculating money. They plug you into a formula and tell you what you'll get at age 65. For some countries it isn't whole lot.
- cpursley 7y ago
  A mix of whole market low fee index funds with Vanguard or the like.
- conanbatt 7y ago
  Freely competing organizations that cater to the citizens preferences and demands. The main reason people would choose a public administration of finances is to get the promise that if they fail, some other sucker will pay taxes to cover it.
  - jodrellblank 7y ago
    You mean like happened with the big private finance companies and their massive government bailout, because the private sector loves private profit and some other sucker paying for losses?
    - conanbatt 7y ago
      What is private about government bailouts?
      - jodrellblank 7y ago
        What? Private banks and finance companies, for-profit companies. They benefited from not-private, taxpayer-funded government bailouts.
        conanbatt 7y ago
        Government bailouts are not private actions, it's literally a public intervention, contrary to my suggestion of the government not managing people's money.
TuringNYC 7y ago
Note that even for private pensions the government is often on the hook, eg via https://www.pbgc.gov https://www.pbgc.gov They do some due diligence, but it isn’t debatable how good the asset liability management is.
tempguy9999 7y ago
> Maybe the problem is that government shouldn't have people's retirement funds to manage. True, we shoukd leave it to private industries. https://en.wikipedia.org/wiki/Robert_Maxwell#Aftermath:_Theft_of_pension_funds,_collapse_of_a_publishing_empire https://en.wikipedia.org/wiki/Robert_Maxwell#Aftermath:_Thef... I guess you're american as they seem to doubt government all the time, despite it working in other countries.
deleted 7y ago
[deleted]
bilbo0s 7y ago
>Maybe the problem is that government shouldn't have people's retirement funds to manage. All pension funds, effectively, have government as, at minimum, the backstop. No way the government would let a large private pension fund fail. (At least, I don't think they would? Maybe I'm being naive?)
- conanbatt 7y ago
  If its a single fund, like Enron's pension fund, they are toast. If its a chunk big enough like the 2008 crisis, then they swoop in. Remember to bet in things that fail big time!

somebodythere 7y ago

Hmm. Pensions are obligated to deliver a defined benefit in dollar terms, or try their best to do so. In a world where interest rates are being pushed lower every year, pensions are basically forced to move to riskier assets to deliver the same nominal return. (This is, in fact, one of the main points of lower interest rates.) Because pensions are not marketable instruments, it's also not possible for these risks to be priced in. (If a bond had, say, a 50% chance of default, its price on the market would also decrease, pushing up its effective yield. It seems pensions are more of an instrument that is doomed to fail, and expecting them to hold up to their promises is going to lead to a lot of pain for either retirees, or the current and future workers supporting them.

throw0101a 7y ago
> Hmm. Pensions are obligated to deliver a defined benefit in dollar terms, or try their best to do so. That is traditionally what most people mean by "pension", but it is DB pensions aren't the only kind. There are also defined contribution (DC) pensions: * https://en.wikipedia.org/wiki/Defined_contribution_plan https://en.wikipedia.org/wiki/Defined_contribution_plan
mrfredward 7y ago
In the past, responsibly run pension funds projected a conservative rate of return to account for these risks. The problem isn't the financial model of pensions, but the politics of it. Lowering the expected rate of return of a pension fund causes a huge increase in the funding requirements that are calculated, and a suddenly appearing budget problem such as this is bad news for people's political careers. The same problem exists in the private sector. Changing the model to project a lower rate of return hurts profit numbers in the near term and makes a huge liability appear on the balance sheet, so executives will kick the can down the road as much as they can. The problem is only worse with public sector pensions because of regulatory differences.
- Kalium 7y ago
  Another wrinkle is that in the private sector, the entity can go bankrupt and that's that. In the public sector, the government entity is almost certainly on the hook forever.

rossdavidh 7y ago

In the U.S., anyway, part of the motivation for states to allow riskier investing, is that the state governments aren't paying money into the pensions funds as they should. Illinois is one of the states which is worst at this; the state legislature has literally broken its own laws (without changing them) by not paying into the state pension funds as it is required to. This has been going on for years, and is more or less shrugged off. So, it's not classical "deregulation" that's the issue, because it's more fundamentally about state governments (in at least some cases) not wanting to raise taxes (or cut other spending) now, so they let pension funds invest in riskier assets to try to make up the difference. Also, the numbers you give show over a third in stocks, which have experienced drops of 50% in living memory. That would seem to be enough to cause a problem even in that case, wouldn't it?

apexalpha 7y ago
>Also, the numbers you give show over a third in stocks, which have experienced drops of 50% in living memory. That would seem to be enough to cause a problem even in that case, wouldn't it? I tried to find the 2008 report but the oldest one is 2010. Luckily it has a 5-year-earlier section: https://imgur.com/a/jFUs8bV https://imgur.com/a/jFUs8bV It's Dutch but you can see that they lost 14.5% total in 2008 and then made 14.8% return in 2009 and 10% in 2010. Since they always have fixed income bonds and cash on hand I don't think it's a problem. And in 2018 the fund had €10bn of assets. Seems to be doing great.
Godel_unicode 7y ago
> ...which have experienced drops of 50% in living memory. And those drops were immediately followed by a return to previous levels. Pension funds are in it for the long term, and has been mentioned elsewhere in the comments a decade of lower stock prices here or there isn't that big of a deal for them. Being underfunded obviously is an issue, however.
LorenPechtel 7y ago
Yup, it's the same problem you always get when you have the same people making the rules as are the ones bit by the rules. It's easier to redefine proper than pay what a proper answer costs. In practice it's almost always government that falls victim to this because in any other case the government is likely to write some rules.

mpalczewski 7y ago

50% in bonds during a time of historically low interest rates is risky as fuck. If those bonds are negatively yielding, then it's just pure corruption. If rates go up, the current value of your bonds drops like a brick. Somehow negative yielding bonds are seen as less risky than holding on to just cash.

martin_bech 7y ago
Well thats because bonds are in many cases less risky than holding cash.. in the EU “cash” in a bankaccount is only guaranteed up to 100.000 euro.. bonds are guaranteed for full value in most cases.
- mpalczewski 7y ago
  That's interesting. In that case cash in a safe would be the better option. You still have negative carry(insurance, rent, security, etc.), not sure how that would compare to the negative yielding bond. Hmm, if enough did this and put it together in some vault and perhaps lent some fractional amount of this money if an appropriate opportunity presented itself you might even make money on this. I just described a working banking system. Makes me wonder how banks could even be solvent in this environment. Are they just regulated into existence. It all sounds like a house of cards at this point.