
World's Best-Run Pension Funds Say It's Time to Start Worrying - kungfudoi
https://www.bloomberg.com/news/articles/2019-10-06/world-s-best-run-pension-funds-say-it-s-time-to-start-worrying
======
ThrustVectoring
The fundamental issue is that saving _financial assets_ today has essentially
zero impact on the total consumption of future retirees. Instead, what matters
is 1) the amount of real goods and services future workers generate, 2) how
much of this production they give up in tax transfers to retirees or sold for
financial assets owned by retirees, and 3) how many workers there are per
retiree.

As a society, we _cannot_ collectively save our way out of the coming pension
crisis. Already economic growth is basically not capital-constrained - if an
extra billion dollars starts sloshing around the system, it simply raises the
market capitalization of existing bonds, businesses, and real estate by a
billion dollars. Public companies, on net, _return_ cash each year to
investors. Saving doesn't make future retirees as a class wealthier, it simply
rearranges the rank ordering of future retiree wealth while allowing current
retirees to spend more via higher asset prices.

So, what can future retirees collectively do? Have more children, allow more
immigrant workers, increase future tax transfers, force higher savings rates
on future workers (eg, student loan debt, mortgage repayments, land rents),
retire later, or accept a lower standard of living. What individual options
are there? Basically all you can do is save more and wind up in a more
privileged tranche of future retirees, and hope that society winds up rich
enough to support your retirement dreams. There's _some_ room for optimizing
your investment strategy so that it minimizes costs and risks, via tax-
advantaged accounts owning broad-market index funds, but there's only so much
juice to squeeze there.

~~~
tenpies
What makes me somewhat mad are the (Western) countries "solving" their public
pension problems through immigration. Not only do you then destroy the tax
payer base in the country that loses the emigrant, but you're just pushing the
problem down the line so that the immigrants that saved you tomorrow, are
themselves screwed when/if they ever get to retire.

It's literally a legal Ponzi scheme and in many cases, you are legally obliged
to play.

I'm looking at you Canada.

~~~
throwawaycanada
Yeah the new push is to drive our population to 100M in 80 years from about
37M now. It costs $2300/mo in our biggest cities for a single bedroom
apartment on average.

~~~
anon1m0us
A lot of this is the rush of foreign investment and the government you elect
caring more about the tax revenue from people who don't even live in your
country over the welfare of their own constituents.

~~~
quaquaqua1
Agreed, however it's also a result of overly strict building and zoning codes
that don't allow density to increase in exchange for a reasonable price.

The result, however, is tragic. People just live in "illegal" housing
situations like stuffing 4 or 5 people into a 1 bedroom or 2 bedroom
apartment, where people just create temporary walls to zone off part of the
living room or use an extra large closet for extra "bedrooms".

Thus the city loses out on tax revenue AND preventing population increase in
certain areas, which is the whole point of these restrictive zoning laws.

------
aazaa
> 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
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
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.

~~~
vladimirralev
> 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
> 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
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.

~~~
thoughtstheseus
I agree that quasi-equity purchases will be on the table. ETFs have different
voting rights than direct stock. Governments won’t let these pensions fail in
mass. Also look at dual interest rate options like teltros in the ECB.

------
viburnum
The underlying problem is that, aside from hoarding canned food, consumption
in the future must be produced by workers in the future. How do you make
claims on the output of workers in the future? Pension funds buy up financial
assets, so workers in the future will have to give money to the owners of
those assets (old people) as interest payments on debt and corporate profits
on the goods and service they buy. All of this is intermediated by the
financial sector. Financial sector profits and executive compensation keep
going up, which means less is left over for investors. The share going to the
financial sector is increasing because they are winning the class struggle.
One alternative is to bypass the financial sector completely, and simply give
old people money and finance that with taxes. Social Security transfers a
little under 5% of GDP from working people to old people, with very little
overhead, independently of financial market tempests.

~~~
BenoitEssiambre
>aside from hoarding canned food

That's not true. A lot of non financial assets can last years or even decades:

Cars, houses, renovations, factories, inventory, household supplies (toilet
paper, razor blades etc.), clothes, tools, durable goods, washing machines,
stoves, furniture, some commodities (processed metals, wood, sand, gravel
etc), building materials, public infrastructure, education, some food items
(salt, sugar, rice, pasta ...).

If you know that the ratio of workers to consumers is dropping, it might make
sense to promote investment in these things before workers become too scarce.
Incidentally, low or negative interest rates promotes investment in these
things.

Buying these things is a way for people to save and consume at the same time.
During a recession, promoting spending in these categories is probably a good
way to boost GDP without pushing people to draw down their savings too much.
They can instead go from financial savings to physical savings.

~~~
elliekelly
> Buying these things is a way for people to save and consume at the same
> time.

This is the myth that Baby Boomers have been fed. They've been told their home
is worth $X but when they're ready to retire and the next generation can't
afford to buy it they're going to suddenly be without the savings they've been
banking on and we're _all_ going to be in a boatload of trouble.

~~~
BenoitEssiambre
It doesn't have to have positive returns to be considered a saving. You buy a
house, you get to live there rent free for decades even if you can't sell it
for much at the end. That's still worth a lot.

~~~
elliekelly
I'm not really clear how it's rent free when you're making monthly mortgage
payments? That seems rent free in name only.

~~~
BenoitEssiambre
We're talking about buying a house as a form of saving vs buying other
financial assets. The part that you borrow is not savings. Only your home
equity is savings. The part that the bank owns is not savings to you.

------
tekkk
I am already worrying but so what? Sell everything and have all cash? And what
then, wait for the "crash" to happen?

Sure the article gets clicks but in reality, if you have invested smartly and
with a long-term outlook it shouldn't matter if the market took a momentary
nosedive. Good companies remain good companies and I don't mind being invested
in them even while my holdings go temporarily to perhaps negative.

One of the most annoying things as an investor I feel is the constant pressure
to validate my investments to see if I should I sell them or not. It's just
too much of a hassle and unless the company really does something dumb, I'll
keep holding until the sun starts shining again. I'm not in a hurry either way
as a young person, so time is on my side.

~~~
scrooched_moose
I tend to follow Benjamin Graham's advice from The Intelligent Investor.
Summarized by investopedia:

\- Graham recommended distributing one's portfolio evenly between stocks and
bonds as a way to preserve capital in market downturns while still achieving
growth of capital through bond income. Remember, Graham's philosophy was first
and foremost, to preserve capital, and then to try to make it grow. He
suggested having 25% to 75% of your investments in bonds and varying this
based on market conditions. This strategy had the added advantage of keeping
investors from boredom, which leads to the temptation to participate in
unprofitable trading (i.e. speculating).

I've been shifting over to bonds for a while now (currently sitting something
like 70/30). Running the numbers on where I would have been if I hadn't
started swinging towards bonds, I haven't missed out on much at all. The S&P
is pretty flat since the January 2018 peak, and I'm in a safer position if a
crash happens.

[https://www.investopedia.com/articles/basics/07/grahamprinci...](https://www.investopedia.com/articles/basics/07/grahamprinciples.asp)

~~~
pfarnsworth
Bonds or bond funds? Those are two different beast with two different
behaviors when crises hit.

~~~
fred_is_fred
A lot of people buy bond funds and think they own bonds. Bond funds can lose
principal quite easily, bonds generally cannot, but are a pain to buy.

------
all_blue_chucks
The headline sounds worrying but the article is merely about technicalities of
European pension regulations in light of low bond yields.

~~~
ganitarashid
In a way europeans are reaping what they sowed

~~~
simongr3dal
What has Europe sowed and what is it reaping?

------
jacquesm
The time to start worrying is long past. If you aren't worried yet then you've
been ignoring the tell tale signs that are all over the business world.
Safeguards instigated after the last close call are being relaxed, whole asset
classes (including regular savings) are no longer viable and pensions are
being cut while at the same time the age at which you get are eligible is
being raised.

2008 wasn't the worst crisis ever, that doesn't mean we've seen the bottom of
the pit yet.

If you are counting on others for your old age then maybe think again.

~~~
tptacek
This isn't an article about pensions and retirement savings. It's an article
about financial indicators, which pension funds, with their enormous amounts
of funds under management, have a unique perspective on. Most of your comment
isn't responsive to this article at all.

~~~
jacquesm
On the contrary. This is all about the 'solvability' demands on pension funds,
which are driven to a large degree by computations involving future yields,
which in turn depend on interest rates and other market indicators. The trends
has been - for years - that the combined elements of demographic time bombs
and historically low yields spell out that pension funds will likely not be
able to fulfill their obligations.

So if you are going to depend on one of these for your future sustenance you
need to re-do your homework or you may end up with a real problem in old age.

~~~
anon1m0us
Prior to social security and pensions, people had kids to care for them in
their old age. In order to do that, parents would save and the children would
inherit the wealth they had created.

Now society is different. Older folks don't rely on children anymore, they
rely on corporations and the government. They reverse mortgage their homes
instead of leaving them to their children.

The family has broken down. Extrapolate that to communities. Companies.
Friends.

Our society is broken for everyone but the wealthy in power and they don't
want to help anyone else either.

~~~
rdm_blackhole
> people had kids to care for them in their old age

Bringing kids in this world to take care of you when you are old is probably
the most selfish thing you can do.

~~~
jacquesm
In many third world countries this is still the case. One of the biggest
indicators of how wealthy a country is is to see what the average number of
children per couple is. It's the first thing to drop once the feeling that the
country will be able to deal responsibly with its elderly is established.

------
curiousgal
To a student looking to go into quantative finance instead of data science,
the number of negative finance headlines on the front page is worrying.

~~~
avip
On the contrary. The less predictable a future is, fear creeps in and the
oxygen-deprived managers develope an urge to be surrounded with more
Astrologers. Or the more socially plausible option - Mathematicians.

------
StanAngeloff
Nobody "wants" another recession. We all read these articles, though, and then
go on to spread them amongst peers like wild fire. The echo chamber only gets
louder as time goes on. At some point those predictions/analyses become
irreversible and de facto a self-fulfilling prophecy.

I've started refraining from talking about negative financial news with
friends and family.

~~~
freehunter
Is there any evidence that talking about a possible recession with your
grandmother or uncle could actually cause a recession to happen? Are
recessions like Tinker Bell, they only exist if you believe in them?

~~~
dodobirdlord
For a country like the United States, recessions are at least somewhat like
Tinker Bell. It's hard for external factors to seriously impact the US
economy, as evidenced by the fact that growth is seriously slowing in China
and several major EU nations are either in recession or very close to it, and
the US economy is still growing. The major factors that influence the US
economy are largely people's willingness to borrow, lend, and spend. If you
can convince a large enough share of people that a recession is imminent it
will actually happen as they pull their assets back from risky growth-fueling
investments into low-risk low-growth investments. This will limit growth
opportunities in the economy. If this gets bad enough it can impact the
function of certain types of existing businesses that depend on capital
markets for liquidity, and the economy can actually begin to contract.

~~~
grey-area
_For a country like the United States, recessions are at least somewhat like
Tinker Bell. It 's hard for external factors to seriously impact the US
economy_

Multiple trade wars precipitated by the current president certainly impact the
US economy (and the global one). The coming global downturn will be almost
entirely self-inflicted, but it won't be down to gossip about a possible
recession, it'll be down to massive trade barriers imposed by fiat.

Trade wars are bad and hard to win.

~~~
ericd
We’ve been stacking tinder for a very long time with our monetary policy, as
well as shifting demographics. The trade war might be the spark, but a spark
on a clean forest floor doesn’t do much.

------
throw0101a
The "best-run" rating comes from the Melbourne Mercer Global Pension Index:

* [http://www.mercer.com.au/globalpensionindex](http://www.mercer.com.au/globalpensionindex)

* [https://australiancentre.com.au/projects/melbourne-mercer-gl...](https://australiancentre.com.au/projects/melbourne-mercer-global-pension-index/)

Technically Denmark is the second-best, with a score of 80.2 versus
Netherlands' 80.3

------
blhack
The most worrying thing is that the media machine seems to _want_ this
recession to happen. It's madness. It's like they want to destroy the world's
economy for their own short-term click metrics.

~~~
n0t-satoshi
Recessions aren't due to how people feel. It's the freezing and culling of
debt.

~~~
zxcmx
You stated that rather authoritatively but I'm not convinced there's any real
consensus on the matter.

After all, _why_ do people freeze / cull debt?

~~~
raducu
Because in non-negative interest world there's a limit on how much debt you
can take?

~~~
zxcmx
I agree! But a person or business choosing whether to take on more debt is
going to rely on just the cold calculus of income and outgoings?

I believe that how take into account how secure they feel in their job,
whether everyone else seems to be panicking about the economy, housing fomo,
etc.

------
neonate
[https://outline.com/Jr68vZ](https://outline.com/Jr68vZ)

------
robk
European pensions may be well run but they are hugely under exposed to venture
and tech overall so I'm skeptical of them crying wolf about the tech industry
when they have so little exposure to it.

~~~
tptacek
Are American pension funds particularly exposed to venture? My understanding
of this industry comes almost entirely from the Kauffman report, which I'm
sure is very dated, but that understanding is that venture as an asset class
is just a small slice, and invested in primarily because of asset manager
requirements to look for un-correlated assets.

If that were true, that wouldn't be an argument that a collapse in tech
wouldn't be a systemic failure, because of course all sorts of other actors
are connected to tech.

------
rolltiide
And then the ECB calls all the debt, gutting all Europe based corporate
borrowers for actual assets on ECB balance sheet

And then Germany seizes ECB

Germany finally wins European Single Market, and predictably steers
productivity as their culture was already optimized to do

------
glofish
One thing I have learned is that when it comes to mass media articles the best
bet is to always do the opposite they are saying. Like "George" in Seinfeld,
they are most of the time wrong, thus doing the opposite is right.

------
DoctorOetker
to me what is worrying is not that pension funds are crying about trouble
(although it may end sadly for those to be covered)

what is worrying is that people keep the current economical system which
creates the need for pension funds.

if all immobilia were rent only, and the rent was continuously redistributed
per capita to the population, then everyone would enjoy the average rent:

housing: everyone sleeps somewhere and the total expenditure on housing is
fairly redistributed,

food: everyone eats something and the farmers use the bulk of their income to
rent the land, so the population gets a significant fraction of their food
payed back

energy: wind and solar take up space, competing with farms and housing, and
the energy companies spend the bulk of their income on renting that land

ecology: we can democratically agree to leave a fraction F for nature of
different degrees of wildness, and only put up the the rest for human rent

in such a world, why do I need a pension fund? when I am old and less mobile,
I can be satisfied with smaller housing, less transportation to compensate for
my probable inability to work. If you look at how elderly are [mal]treated in
elderly homes etc, I would prefer to be in control of my fair share of average
rent, so that if I don't like a place I can go rent somewhere else. Instead of
having to gamble today if insurance company X will be solvent in the future,
or even if it is, if the resulting pension will even cover for food, housing,
... while with average rent, while the average rent does not devalue with
respect to the average rent other people receive...

why would I need health insurance? in the current world I would need it
because of unexpected lump payments to hospitals etc, but in the system of
average rent (under correct compliant conditions), I could set up a standard
smart contract for health: "if you treat me now, part of my future income will
be diverted for a duration long enough to cover the medical bill", or I can
choose to disagree _at the moment itself_! The current system requires you to
predict in advance for all possible medical urgencies, and across all
available treatments if you agree on average. There are situations where I
would decide against a certain proposed treatment, with another treatment not
being covered. But then why did I pay medical insurance for the last X years??
With a system of average rent, your expense is a free trade at the moment it
arises and you are capable of consulting your feelings about a certain
proposal, instead of having to guess in advance if you will like what is
compatible with your insurance plan...

~~~
sm4rk0
> what is worrying is that people keep the current economical system which
> creates the need for pension funds

Exactly. And what is worrying is that your comment (laying at the bottom of
the page) is the only one so far talking about solving the problem by thinking
out of the box.

I'd be even more free to mention a money-less world, or resource based economy
as a solution, but people are too deep into this system to even comprehend
that idea, let alone believe in it.

Edit: Related article:
[https://news.ycombinator.com/item?id=21173493](https://news.ycombinator.com/item?id=21173493)

------
TaylorSwift
Does anyone know how to bypass Bloomberg's paywall?

~~~
tehlike
[https://outline.com/Jr68vZ](https://outline.com/Jr68vZ)

