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Who in their right mind puts margin on pensions? Let's just keep building the house of cards higher and higher, that's a very good idea.
by seer-zig 4y ago
Who in their right mind puts margin on pensions? Let's just keep building the house of cards higher and higher, that's a very good idea.
- dboreham 4y agoSomething, something, defined benefit, it seems. I had no idea defined benefit pensions were still a thing.
- blockwriter 4y agoThey’re enshrined in the constitution of my home state, Illinois, for the public sector, I believe.
- tofof 4y agoNot that the legislature met the obligation of actually funding them for like 30 years, though.
- bushbaba 4y agoGoing to be an interesting next 2 decades as these funds insolvency becomes an issue.
- landemva 4y agoEither feds take over this obligation, or Illinois will go bankrupt, legally disolve, and the land will be absorbed by neighboring States. This is why I expect a federal UBI.
- collegeburner 4y agowhy th should i be paying for illinois underfunding its pension obligations. this is not some natural disaster where the government couldn't predict it, so screw that. i hope all the other 49 states vote against any of that nonsense.
- deleted 4y ago[deleted]
- dragonwriter 4y ago> Either feds take over this obligation or Illinois will go bankrupt, legally dissolve, and the land will be absorbed by neighboring States. US States cannot go bankrupt (They are not only not covered by bankruptcy law, but there is a reasonably strong argument that state bankruptcy would violate the contracts clause. (And the public entities that can go bankrupt via municipal bankruptcy in US law do not legally dissolve when they do.) > This is why I expect a federal UBI. That seems…unrelated.
- HarryHirsch 4y agoYou'd think that annuities were easy, they don't have many variables and have been studied for centuries.
- Nursie 4y agoThere are a lot of retired people in the UK who are living off them at the moment, they were only really phased out for new entrants about 20 years ago, and for a lot of people they were able to continue to build them if they were already part of one. So it's going to be a long time before all those people, both retired and not, are dead. Plus the public sector in the UK still offers them.
- shapefrog 4y agoBoomers - no contribution with a defined benefit out. For some reason when they realised they were a bad idea they got rid of them for everyone else but themselves.
- triceratops 4y agoMatt Levine about this on today's Money Stuff: "I know this is bad but I find something aesthetically beautiful about it. If you have a pot of money [pensions] that is immune to bank runs, over time, modern finance will find a way to make it vulnerable to bank runs. That is an emergent property of modern finance. No one sits down and says “let’s make pension funds vulnerable to bank runs!” Finance, as an abstract entity, just sort of does that on its own."
- boomboomsubban 4y agoSurely nobody in the world of finance has been making money off of these pensions becoming vulnerable to bank runs. And even if there were someone profiting, they wouldn't have done so by choice, it just happened.
- thfuran 4y agoIt's an inevitable consequence of Madoff's Third Law of Finance. There's just no getting around it.
- ISL 4y agoFrom my read of Levine's explanation, it was really the promise of a greater pension outcome for a given amount of contribution. Whether the contribution was smaller or the outcome larger is kinda immaterial -- the managers were chasing yield.
- kasey_junk 4y agoAnd also accounting rules not really being well factored for the pension use case.
- mejutoco 4y agoI am not an expert but if someone managing a pension fund makes it less underfunded by using some of these instruments/techniques they might get a bonus for good performance, don't they? Or am I misunderstanding something.
- 4y ago
- lvl102 4y agoBasically pensions used gilts as collateral because it was viewed as risk free. That changed overnight.
- anonporridge 4y agoAny financial professional who holds space in their belief system for "risk free" gains should be immediately fired and barred from managing anyone's money ever again.
- akimball 4y agoIt is risk free, held to maturity. 50 year bond market prices however, vary strongly in response to interest rate changes. Since these bonds are issued by the bank of England and since interest rates are set by the bank of England this is a crisis entirely & predictably created by the bank of England.
- weard_beard 4y agoDefinitely not the pension funds who chose to diversify from gilts into riskier securities and then took out margin to buy more gilts as a hedge thereby destroying the long term durability AND THE ENTIRE PURPOSE of a pension…
- landemva 4y agoAs long as pensioners will not claim anything until 50 years (calendar obligations match), then it is risk free.
- shapefrog 4y agoAnd you dont engage in any reasonable accounting measure that would value the assets you hole.
- ALittleLight 4y agoI don't really understand the financial situation here, but my guess would be, if this were actually risk free money then there wouldn't be an issue here.
- evandwight 4y agoSelling derivatives looks great until it doesn't.
- helloooooooo 4y agoAll funds use margin as a liquidity mechanism. If it takes a few days to settle funds and you need cash right away, you dip into your margin
- anonuser123456 4y agoWhy not? The government will bail out the funds. Meanwhile, there are bonuses to be made on a quarterly basis. Heads the fund managers win. Tails the taxpayer looses.
- skippyboxedhero 4y agoIt was actually funny to read the comments in the FT from people who work in the sector...everyone was doing it, this was a perfectly sound strategy, you have to hedge (the irony of losing £60bn in four days from hedging apparently not correlated to whether the hedges worked)...there was a guy who is CEO of a clothing company who actually wrote to the BoE about these strategies, the response was not just anger that he was right, it was rage (it also didn't help that this CEO was a big supporter of leaving the EU). Either way, this is something that has been warned about since QE started, the BoE repeatedly denied this was an issue, it was obvious, multiple books have mentioned this, I have heard it a million times from market participants, I talked about this with other people...and the BoE are trying to shift the blame feverishly. The chances that this doesn't happen in other countries is close to zero. The buildup in risk due to QE has been massive, and DB pension funds are patient zero.
- hn_go_brrrrr 4y agoGot a link to the FT article? I'd enjoy reading those comments.
- walthamstow 4y agoThink it's this one they refer to. The FT has the best comments section on the internet, IMO. https://www.ft.com/content/5802c53b-3130-462c-8fb3-e3e6203f10a7 https://www.ft.com/content/5802c53b-3130-462c-8fb3-e3e6203f1...
- sofixa 4y ago> The FT has the best comments section on the internet, IMO. Mostly yes, but depends on the topic. Anything where Brexit can be involved (anything about an EU or EU country problem, or UK issue), there's a bunch of stupid comments, mostly empty pro-Brexit ones. Anything tech is usually mostly technically oblivious financial people (oh VMware have a great position, numbers looking good, tech is amazing). Anything where Russia is involved, there's at least a few (idiots|Russian trolls|etc.) getting eviscerated.
- runeks 4y agoWhat else can you do when your task is to deliver a fixed income stream to pensioners and interest rates are 5% one year and 0% the next? The fundamental problem of our current monetary system is unstable interest rates. Pension funds can't fulfill their purpose under these circumstances. Not without taking risks, at least.
- midasuni 4y agoInternet rates have been more stable over the last 14 years than at any point in recent history. Even with the combined problems of covid recovery shocks and the Ukraine war it wasn’t going terribly until the inexplicable budget last week.