The Great Pensions Con

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Daily Express was lauding the government’s action to reduce the charges companies can levy on pensions as a great a great deal for pensioners. Taking the government’s figures at face value, The Daily Express seems right, if a fee of 1% reduces a savers’ pension pot by £130,000, capping that fee at 0.75% will greatly increase the value of their pension. However while action to tackle the high fees levied on pensions is very desirable it is ignoring the real problem with British private sector pensions. What matters is not the money value of the pension in 40 years time, buts it real value, can that pension sustain the pensioner in their desired standard of living in forty years time? Unfortunately given the way the pension industry is run run at present for most people it is very unlikely that will happen.

What the government fails to understand is that pensions that are paid in forty year’s time are paid out of the national income in forty years time. If the economy has undergone a period of sustained and real growth pensions can be quite generous, if however the growth is largely illusory, that is an inflationary expansion in national income, even the most generous of incomes will be quite miserly in terms of their purchasing power. Pension fund managers unfortunately aim for the rapid illusory short term monetary increase in the fund as it is this that determines their bonuses and income.

Rather than being put into investments that will increase real economic growth, pension funds are invested in a whole host of short term speculative ventures. Whenever there is a takeover mooted, one large source of funds is always the pension funds. Evidence shows that takeovers yield little real growth but a instead a source of funds for the buyer. One example is the former electrical giant GEC that squandered its cash on buying over priced technology companies that proved worthless when the dot com bubble burst, leaving GEC bankrupt. More usually the profitable assets in the taken over company are sold off which increases the money value of the pension fund but it is not matched by any increase in real income. There is another illusory source of pension fund growth. Fund managers lend to private equity firms, who are brilliant at maximising income for themselves but not there clients. They operate a ‘2 and 20’ rule. A fee of 2% is levied on the money handled and of the venture is profitable they take 20% of the profit made. Pension funds being a convenient cash cow for everybody but pensioners. There is not one speculative venture that is not funded without pension fund money. Consequently these funds can show rapid growth in their monetary values, but which is not matched by any real growth in national income.

Perhaps the most pernicious of fund managers practices, is their habit of lending their shares, for a fee of course, to speculators these speculators can then sell these borrowed shares to force down the price of the shares in the company they borrowed. They then buy shares at the new lower price to sell on in place of those they borrowed. Their profit is the difference between the price at which they sold and that at which they bought. Why fund managers do what is obviously an action detrimental to the fund is a mystery. Obviously they hope in some way to make a profit from this speculative venture. Do they mimic the actions of the ‘naked short seller’? This speculative activity does not represent a responsible investment policy to maximise future returns for the fund. Playing silly games with money is not a sensible investment strategy.

Lending the funds shares to financial traders for speculation, does not suggest that pension funds are in the best of hands.

A responsibly managed pension fund would be an asset to the British saver, whereas an irresponsibly managed one is not. There are examples of well managed pension funds but few are British. Although it not called such the responsibly managed Norwegian sovereign wealth fund is an example. In Norway the government has invested the proceeds from oil into a fund which invests in real as opposed to money assets around the world. Some of this money is invested in the British infra structure, investments that will continue to earn money for the Norwegians into the indefinite future, money that will finance Norwegian spending on welfare. Dubai has invested its money into buying real assets the British ports and the P&O shipping line. Assets that will continue to earn money when their oil incomes diminish. There is very little such foresight shown in the British pension industry.

One of the main reasons for both the Labour and Coalition governments promoting these new workplace pensions, is the prospect of being able to reduce the cost of the state pension. What they hope is that an increased workplace pension will increasingly supplement an ever diminishing state pension. There is nobody so naive or foolish as the British politician who believes in the promises of the finance industry. Despite all the scandals and failures within this industry they continue to believe that they will deliver on private pensions, when evidence demonstrates the contrary.

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