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Why are pension funds borrowing money?

• twawaaay 4y ago
  That is very good question. These guys probably think they can predict the future, and we all know that's just not possible. Personally, I think it is hard enough to invest long term in stock issued by reputable companies. At least with companies you can try to understand their situation and whether they are likely to succeed and worth their share price.
• olladecarne 4y ago
  Pension funds take money from poor people and give it to rich people, just like everything else. When the economy is doing well, rich people make billions by managing them, and when it's not doing well rich people still make billions until the funds become insolvent. Here's a PBS documentary on the state of pensions in the US: https://youtu.be/_r0htm5uHPQ https://youtu.be/_r0htm5uHPQ
  • sicp-enjoyer 4y ago
    Somehow I don't think you're giving the full picture.
    • socialismisok 4y ago
      What's missing from the picture?
      • sicp-enjoyer 4y ago
        Well any kind of nuance or perspective. Here is one thing to consider. A pension trades returns for stability. People pick a pension as their form of retirement because they have a lower risk tolerance. Anytime these tradeoffs are happening you are going to see wealthy people who took the risk side and came out ahead. Did you know your insurance company is getting rich off your premiums? Are you going to stop paying them and get out of this "greedy" arrangement that takes from poor you to rich them? Obviously my comment isn't the full picture either. These institutions often have moral hazard, etc.
        • socialismisok 4y ago
          My insurance company should be, imo, unable to get rich off me. Insurance should be nationalized, imo. But it's the only game in town. I'm a socialist, but until there's a world where we're all taking care of each other and running worker co-ops, I'm going to have to operate in the existing structures.
          • gorgoiler 4y ago
            How do mutualised institutions — building societies, credit unions, profit sharing with employees — fit into your world view? Are there credit unions that offer insurance products, or is it too risky lumping peoples savings with a risk-forward product like insurance?
            • socialismisok 4y ago
              Generally I'd prefer them over capitalized institutions. At least the people who are making things work are seeing direct positive results. In some cases (eg health insurance) I believe a single large national pool is preferable. Should credit unions offer insurance... I am not sure. I think it's reasonable if that's what the credit union members want, but they'd need to be very careful about the policies they were issuing and the potential payouts.
          • tpxl 4y ago
            > My insurance company should be, imo, unable to get rich off me. Where I live, there's a cap on the profits from insurance. I've gotten letters a few times saying due to high profits, the premium for the last month of the year was going to be lower. That doesn't prevent them from running other scams like 10 year 'insurance savings' with 1% total yield, but those are optional.
        • cmeacham98 4y ago
          If pensions trade risk for stability, then why does this article exist?
          • 4y ago
    • hackerlight 4y ago
      It's not the full picture only because a handful of pension funds do their job properly, they come up with a sensible diversification and put it into passive instruments. Everything beyond that is a scam. High fees for what should be a simple task, or taking reckless risks or allocating to active managers, is where the scam part comes in, and most of the industry is guilty of that.
      • sicp-enjoyer 4y ago
        Complaining about finance compensation is common, but like sales, it's directly tied to earnings. Suppose you take an easy strategy and get 6%. Suppose a professional can work hard and get 6.2%. It's well worth paying for that top performer when you have a pension of $500 million. My guess is that much of the distortion is caused by moral hazard where pensions know they will be bailed out for taking ridiculous risks, not because they pay professionals to manage money.
  • wyager 4y ago
    Have you considered that you have the causality flipped, and that people are generally rich because they're good at making money under adverse conditions? Would you expect someone who was capable of accumulating large amounts of wealth to get BTFO by a market downturn? If pensions have a problem, it's because they were never economically viable, and at this point basically serve as a vehicle to transfer money away from the majority of people and towards retired boomers and government employees.
    • freemint 4y ago
      > Have you considered that you have the causality flipped, and that people are generally rich because they're good at making money under adverse conditions? They might have. However any look at generational wealth dynamics quickly dispels that idea. Any above market performance rich people have are simply able to have better managers because managing bigger pools pays more and maybe an education which focuses on maintaining and building wealth. This education could be widely available but it is not made widely available. I am not going to imply a conspiracy here or appeal to class interests for explanation and just leave it as a statement of fact.
      • wyager 4y ago
        > However any look at generational wealth dynamics quickly dispels that idea Generational wealth statistics, as well as heritability research, are consistent with the idea that expected wealth is causally preceded by genetically heritable factors. Wealth is mean-reverting along genetic lines on multi-generational timescales. The idea that wealth is self-perpetuating per se fails to explain the degree to which e.g. poor lottery winners do not kick off dynasties, why children of moderately wealthy parents also tend to be moderately wealthy (not explainable by direct inheritance), etc. The one domain where your model works better is perhaps for extremely wealthy families like the Rockefellers, but I'm hesitant to say that the model generalizes - that sort of thing might be a rare exception.
        • staticman2 4y ago
          Unless a child is put up for adoption they will inheret a lot more than genetics and money from their parents. For example: The child of a doctor or lawyer is much more likely to be pressured or encouraged to go into law or medicine.
• toomuchtodo 4y ago
  It’s complicated. Matt Levine of Bloomberg explains very well, as always. https://archive.ph/2022.09.29-165000/https://www.bloomberg.com/opinion/articles/2022-09-29/uk-pensions-got-margin-calls https://archive.ph/2022.09.29-165000/https://www.bloomberg.c...
  • omegalulw 4y ago
    This blew my mind. Fantastic explanation.
• sicp-enjoyer 4y ago
  Nobody lets large sums of money sit in cash. Full-filling their retirement obligations requires them to grow that money.
  • xupybd 4y ago
    You can grow money without debt
    • sicp-enjoyer 4y ago
      Certainly true. But the textbook advice is broad market stocks and leveraged long bonds. Aren't they being less risky by using the tried and true strategy?
  • socialismisok 4y ago
    Why do they need to borrow to do that? Surely they could loan to do that?
• missedthecue 4y ago
  because they haven't been able to make money by holding government debt for years. This is a consequence of 0.25% rates on government debt.
• NovemberWhiskey 4y ago
  They aren't really borrowing money. They're having to post collateral against derivatives (probably interest-rate swaps) that have moved against them. Those swaps are supposed to be a hedge against falling interest rates: they lose money in a rising rate environment, and the colossal bungling of the UK economy by the current government has resulted in such large and rapid rises in gilt rates that the collateral calls exceeded cash available to meet them.
  • xupybd 4y ago
    That sounds a lot like borrowing money.
• pyrrhotech 4y ago
  The base problem is that people have expected pensions to pay out like they always did in the past, before the ZIRP era. When real interest rates were positive (like they were for most of history until circa 2010-present), it was very easy to pay out the expected results by just buy and hold treasuries or gilts. When central bankers decided to cure the last recession by artificially holding real interest rates at negative levels for over a decade, pensions had to move out on the risk curve. This led to the everything bubble we have today, with the market overvalued somewhere around 100-300% compared to its historic norms. Once inflation came back, the central bankers ZIRP plans were cancelled, bonds and stocks start crashing and pension accounting no longer balances.
• akimball 4y ago
  The are lending money, by buying British bonds. The bonds are risk-free but only when held to maturity. (The market price for bonds before that time will vary dramatically with interest rates, but the value at maturity is perfectly stable as is the coupon stream.)
• lmm 4y ago
  Levering up for higher returns, possibly encouraged by absurd accounting rules.
• mFixman 4y ago
  Because the government will bail them out if they go bankrupt. Gambling is completely risk-free if it involves UK pensioners.