7 ms·

> The warning comes as pension firms across Europe struggle to generate the returns they need to cover their growing obligations. In Denmark, some funds saddled

by aazaa 7y ago

> The warning comes as pension firms across Europe struggle to generate the returns they need to cover their growing obligations. In Denmark, some funds saddled with legacy policies guaranteeing returns as high as 4.5% have had to use equity to meet their obligations. Using equity to meet current obligations sounds a lot like a Ponzi scheme: > A Ponzi scheme ... is a form of fraud that lures investors and pays profits to earlier investors with funds from more recent investors.[2] The scheme leads victims to believe that profits are coming from product sales or other means, and they remain unaware that other investors are the source of funds. https://en.wikipedia.org/wiki/Ponzi_scheme https://en.wikipedia.org/wiki/Ponzi_scheme Provided that the equity drain is limited in scope, a pension fund can continue to fight another year. The more interesting (or scary) question is what happens when tapping into the equity becomes the norm? At what point does the fund manager level with pensioners and inform them that the fund is in fact insolvent?

tlb 7y ago
When interest rates are negative, there is no other option than to fund current obligations from equity. You can't do it from interest, because there isn't any.
- aazaa 7y ago
  Depending on the fund, there may in fact be another option: more risky assets. As noted in the article: > In the meantime, pension funds have been coping by buying up riskier assets. The Dutch, ranked with Denmark as the world’s best performing pension providers by Mercer, have complained to the European Central Bank about the fallout on the industry. And this is where things start to go off script pretty quickly.
  - pmiller2 7y ago
    And, yet, somehow, I’m expected to fund my own retirement, and these “riskier” investments are literally the only way I can accumulate enough to do so. I know this is about European pension funds, but the US has been “off script” for some time.
  - vladimirralev 7y ago
    > Depending on the fund, there may in fact be another option: more risky assets. Everybody knows the ECB will take some "risky assets" either as collateral or by outright buying it as soon as markets begin to crack. This whole article is just a rant for the public. Behind the scenes some traditional risky assets such as index funds are already on par with mortgage backed securities in terms of risk and will be accepted as collateral by the central banks. > And this is where things start to go off script pretty quickly. There are serious finance people (Mosler) who think this is nothing new and we've been doing "Modern Monetary Theory" in disguise for decades now. It's hard to tell for sure since most of the relevant information is not public, but almost everything makes sense if that's the case. It looks like new finance textbooks are being rewritten now with both QE and MMT mentioned with no references to them being measures of last resort, obscure or unusual. I don't know where this is coming from but it's speculated this is an attempt at normalisation of the current policies and MMT.
    - isoskeles 7y ago
      > Behind the scenes some traditional risky assets such as index funds are already on par with mortgage backed securities in terms of risk and will be accepted as collateral by the central banks. Can you explain this in a bit more detail? What are some index funds are on par with mortgage backed securities and in what way is the level of risk similar?
      - vladimirralev 7y ago
        The risk is similar because the too-big-to-fail phenomenon applies to both. Back in 2009 the central banks stepped in and bought any MBS for sale at pre-crisis market price, still on their balance sheets to this day. They couldn't let MBS fail because it was used as collateral in all kinds of loans. Now we see the same with stocks, so we know what to expect, thus the risk is similar. The central bank of Japan is already openly buying ETFs (stocks) along with many sovereign funds around the world, giving ETFs further credibility as collateral between central banks and governments. ECB and the Fed are following their steps, even though they haven't done public purchases yet. All central banks are singling that buying stocks is on the table, there is no question it will be done in case of emergency.
- buboard 7y ago
  Isn't it irresponsible considering that they have a central bank, so they can raise rates? Otherwise it seems like an intentionally risky ponzi. (Pensions are a Ponzi scheme by definition - but one that is (presumably (ha) ) ran responsibly)
- throw0101a 7y ago
  > You can't do it from interest, because there isn't any. Unless you actually earn returns from the assets that the pension fund holds: * https://en.wikipedia.org/wiki/CPP_Investment_Board#Investments https://en.wikipedia.org/wiki/CPP_Investment_Board#Investmen...
burmanm 7y ago
Not sure why you were downvoted as technically you're not that far from the truth. Most pensions do work this way, next one pays the previous ones. For example in Finland the pension funds were started with the employees back then paying 1,5% of their salary to get pension. These days the rate is ~24% from salary, yet the gains are the same as those with 1,5%. The risk is that current payers won't get their pension if there's no one in the future funding the system. Personally, I think it's very likely that the current payers are getting screwed in the end (by getting their pension cut and those who never payed will keep receiving theirs until they die).
- walshemj 7y ago
  which one a state pension or a private pension provided by your employer.
- ThrustVectoring 7y ago
  Unless you're burying canned food, there's very little time-transfer of real goods and services involved in pension schemes. Current production is current consumption. If current retirees didn't pay "enough" into the pension system, the people getting screwed by that are past pensioners, who did not get the level of consumption that economic conditions warranted.
HSO 7y ago
It's MUCH worse than that. PFs and insurers are going down the credit ladder, taking worse and worse credit quality in order to get SOME yield. Thanks to QE concocted by MSEs (mainstream economists). Don't even talk about China. When this bubble finally bursts, it will be so bad we will look back with fondness on 2008. Kind of like we look back today on 1987 and think what was that kerfuffle all about. There was a funny line in All About Mary: Each year is better than the next. As long as economists are still in power, each bubble is cuter than the next.
- leshow 7y ago
  > Kind of like we look back today on 1987 and think what was that kerfuffle all about. Do we? The 1987 crash was the second worst market crash in history follow the great depression. Or at least that's what I thought? In terms of adjusted dollars was it not worse than the dot com crash and the 2008 crash?
  - ohiovr 7y ago
    I'm not sure the 87 stock correction was worse than the recession preceeding it in the early 80s.
- remi_dez 7y ago
  > Kind of like we look back today on 1987 and think what was that kerfuffle all about. Between January and December 1987 the S&P500 had a positive return. [0] Yes, there was a big crash in the middle, but if you were not over leveraged and didn't look at your investments except in January/December, this was a year of very ordinary returns. Certainly no biggy for long-term, pension fund type investments. [0] http://futures.tradingcharts.com/historical/SP/1987/0/continuous.html http://futures.tradingcharts.com/historical/SP/1987/0/contin...
notJim 7y ago
In some sense, isn't this inherently how something like a pension fund works? Forget about the layers of obfuscation, and think about how the economy works. Some people work and produce stuff, some people do not. The norm (and a defensible one, IMO) is that young people work, and old people do not. This means that some of the output of the work that young people do has to be funneled to old people. You can do that by building up vast stores of wealth and funneling it to people over time, or you can do it by directly taxing current production, but either way the effect is to direct resources from people who produce to those who don't. Theoretically, we take the store of wealth approach, but in actuality that store of wealth depends greatly on the economy backing it to be sufficiently productive that there are enough resources to go around. The pension funds don't control the entire economy obviously, so they have to predict as best as they can. It seems extreme to call it a Ponzi scheme unless there was actual fraud occurring. Edit: thrustvectoring[1] probably does a better job making the point I'm trying to make (or at least a related one.) [1]: https://news.ycombinator.com/item?id=21174917 https://news.ycombinator.com/item?id=21174917
- pjbk 7y ago
  > Some people work and produce stuff, some people do not. And some other people print money, whose value should be tied somewhat to the stuff that some people did or will certainly produce, but now most often does not.
- ThrustVectoring 7y ago
  >You can do that by building up vast stores of wealth and funneling it to people over time, or you can do it by directly taxing current production, but either way the effect is to direct resources from people who produce to those who don't. The "vast stores of wealth" approach is "hoard financial assets, and then sell them to current workers" - that is, savings. Note that this includes financial assets such as mortgages and student loans, and "selling them to current workers" includes them paying down the principal. I don't view it as a Ponzi scheme, per se, but there's a very big problem with defined-benefit schemes: if our future society is not productive enough to support the promised benefits, the only choices are to renege or to increase the transfer from future workers. Defined-contribution schemes have the political advantage of automatically reducing benefits when the economy does poorly.
apta 7y ago
Another issue is guaranteeing returns. This is basically usury/interest, and is the main reason the financial system today is messed up beyond repair, unless someone is willing to step up and ban interest altogether.

by aazaa 7y ago

tlb 7y ago

When interest rates are negative, there is no other option than to fund current obligations from equity. You can't do it from interest, because there isn't any.

aazaa 7y ago
Depending on the fund, there may in fact be another option: more risky assets. As noted in the article: > In the meantime, pension funds have been coping by buying up riskier assets. The Dutch, ranked with Denmark as the world’s best performing pension providers by Mercer, have complained to the European Central Bank about the fallout on the industry. And this is where things start to go off script pretty quickly.
- pmiller2 7y ago
  And, yet, somehow, I’m expected to fund my own retirement, and these “riskier” investments are literally the only way I can accumulate enough to do so. I know this is about European pension funds, but the US has been “off script” for some time.
- vladimirralev 7y ago
  > Depending on the fund, there may in fact be another option: more risky assets. Everybody knows the ECB will take some "risky assets" either as collateral or by outright buying it as soon as markets begin to crack. This whole article is just a rant for the public. Behind the scenes some traditional risky assets such as index funds are already on par with mortgage backed securities in terms of risk and will be accepted as collateral by the central banks. > And this is where things start to go off script pretty quickly. There are serious finance people (Mosler) who think this is nothing new and we've been doing "Modern Monetary Theory" in disguise for decades now. It's hard to tell for sure since most of the relevant information is not public, but almost everything makes sense if that's the case. It looks like new finance textbooks are being rewritten now with both QE and MMT mentioned with no references to them being measures of last resort, obscure or unusual. I don't know where this is coming from but it's speculated this is an attempt at normalisation of the current policies and MMT.
  - isoskeles 7y ago
    > Behind the scenes some traditional risky assets such as index funds are already on par with mortgage backed securities in terms of risk and will be accepted as collateral by the central banks. Can you explain this in a bit more detail? What are some index funds are on par with mortgage backed securities and in what way is the level of risk similar?
    - vladimirralev 7y ago
      The risk is similar because the too-big-to-fail phenomenon applies to both. Back in 2009 the central banks stepped in and bought any MBS for sale at pre-crisis market price, still on their balance sheets to this day. They couldn't let MBS fail because it was used as collateral in all kinds of loans. Now we see the same with stocks, so we know what to expect, thus the risk is similar. The central bank of Japan is already openly buying ETFs (stocks) along with many sovereign funds around the world, giving ETFs further credibility as collateral between central banks and governments. ECB and the Fed are following their steps, even though they haven't done public purchases yet. All central banks are singling that buying stocks is on the table, there is no question it will be done in case of emergency.
buboard 7y ago
Isn't it irresponsible considering that they have a central bank, so they can raise rates? Otherwise it seems like an intentionally risky ponzi. (Pensions are a Ponzi scheme by definition - but one that is (presumably (ha) ) ran responsibly)
throw0101a 7y ago
> You can't do it from interest, because there isn't any. Unless you actually earn returns from the assets that the pension fund holds: * https://en.wikipedia.org/wiki/CPP_Investment_Board#Investments https://en.wikipedia.org/wiki/CPP_Investment_Board#Investmen...

burmanm 7y ago

Not sure why you were downvoted as technically you're not that far from the truth. Most pensions do work this way, next one pays the previous ones. For example in Finland the pension funds were started with the employees back then paying 1,5% of their salary to get pension. These days the rate is ~24% from salary, yet the gains are the same as those with 1,5%. The risk is that current payers won't get their pension if there's no one in the future funding the system. Personally, I think it's very likely that the current payers are getting screwed in the end (by getting their pension cut and those who never payed will keep receiving theirs until they die).

walshemj 7y ago
which one a state pension or a private pension provided by your employer.
ThrustVectoring 7y ago
Unless you're burying canned food, there's very little time-transfer of real goods and services involved in pension schemes. Current production is current consumption. If current retirees didn't pay "enough" into the pension system, the people getting screwed by that are past pensioners, who did not get the level of consumption that economic conditions warranted.

HSO 7y ago

It's MUCH worse than that. PFs and insurers are going down the credit ladder, taking worse and worse credit quality in order to get SOME yield. Thanks to QE concocted by MSEs (mainstream economists). Don't even talk about China. When this bubble finally bursts, it will be so bad we will look back with fondness on 2008. Kind of like we look back today on 1987 and think what was that kerfuffle all about. There was a funny line in All About Mary: Each year is better than the next. As long as economists are still in power, each bubble is cuter than the next.

leshow 7y ago
> Kind of like we look back today on 1987 and think what was that kerfuffle all about. Do we? The 1987 crash was the second worst market crash in history follow the great depression. Or at least that's what I thought? In terms of adjusted dollars was it not worse than the dot com crash and the 2008 crash?
- ohiovr 7y ago
  I'm not sure the 87 stock correction was worse than the recession preceeding it in the early 80s.
remi_dez 7y ago
> Kind of like we look back today on 1987 and think what was that kerfuffle all about. Between January and December 1987 the S&P500 had a positive return. [0] Yes, there was a big crash in the middle, but if you were not over leveraged and didn't look at your investments except in January/December, this was a year of very ordinary returns. Certainly no biggy for long-term, pension fund type investments. [0] http://futures.tradingcharts.com/historical/SP/1987/0/continuous.html http://futures.tradingcharts.com/historical/SP/1987/0/contin...

notJim 7y ago

In some sense, isn't this inherently how something like a pension fund works? Forget about the layers of obfuscation, and think about how the economy works. Some people work and produce stuff, some people do not. The norm (and a defensible one, IMO) is that young people work, and old people do not. This means that some of the output of the work that young people do has to be funneled to old people. You can do that by building up vast stores of wealth and funneling it to people over time, or you can do it by directly taxing current production, but either way the effect is to direct resources from people who produce to those who don't. Theoretically, we take the store of wealth approach, but in actuality that store of wealth depends greatly on the economy backing it to be sufficiently productive that there are enough resources to go around. The pension funds don't control the entire economy obviously, so they have to predict as best as they can. It seems extreme to call it a Ponzi scheme unless there was actual fraud occurring. Edit: thrustvectoring[1] probably does a better job making the point I'm trying to make (or at least a related one.) [1]: https://news.ycombinator.com/item?id=21174917 https://news.ycombinator.com/item?id=21174917

pjbk 7y ago
> Some people work and produce stuff, some people do not. And some other people print money, whose value should be tied somewhat to the stuff that some people did or will certainly produce, but now most often does not.
ThrustVectoring 7y ago
>You can do that by building up vast stores of wealth and funneling it to people over time, or you can do it by directly taxing current production, but either way the effect is to direct resources from people who produce to those who don't. The "vast stores of wealth" approach is "hoard financial assets, and then sell them to current workers" - that is, savings. Note that this includes financial assets such as mortgages and student loans, and "selling them to current workers" includes them paying down the principal. I don't view it as a Ponzi scheme, per se, but there's a very big problem with defined-benefit schemes: if our future society is not productive enough to support the promised benefits, the only choices are to renege or to increase the transfer from future workers. Defined-contribution schemes have the political advantage of automatically reducing benefits when the economy does poorly.

apta 7y ago

Another issue is guaranteeing returns. This is basically usury/interest, and is the main reason the financial system today is messed up beyond repair, unless someone is willing to step up and ban interest altogether.