From yesterday's FT:
Pension funds will be prevented from investing in risky assets, including stocks, (1) by the Pensions Regulator under plans to stop weaker companies with large pension shortfalls from making huge bets.
David Norgrove, chairman of the regulator, will outline his concerns that some schemes are taking risks that could leave a bigger hole in the industry funded Pension Protection Fund in a speech to funds on Tuesday.
"We have to ensure that they are not putting all their money on the 2:30 at Newmarket and if it doesn’t work out, they will fall back on the PPF," he said. "To some extent, we have seen some behaviour like that." (2)
1) Stocks and shares are now 'risky assets', are they? This is basically code for "The UK government would like to strong arm pension funds into either UK government bonds or UK land and building to try and keep the deficit binge, credit bubble and land price bubble going."
2) Anybody in their right mind has been predicting this from the word go. Why on earth should sensibly run and well-funded schemes pay a penny towards underwriting badly run and under-funded schemes? Moral hazard, and all that.
Wednesday, 8 December 2010
Unintended Consequences
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6 comments:
Since the pension funds' tax break is on bonds but not on shares, it's logical that they should invest in bonds. But perhaps not Gilts.
Correct me if I'm wrong but I recall reading somewhere that the PPF made a levy of about 1% of scheme assets. If so it is bonkers when you consider that scheme returns will be in the range of 4% to 8% per annum on average over time. Assuming a 6% return, the PPF is taking 1/6th of that. That's a serious reduction in return for the scheme, approx 15%.
Standard Government move, though. In order to ensure some people don't lose some of their money, they make sure everybody loses some of their money.
Hmmm... Wouldn't forcing all the pension funds out of the equities markets engineer the mother of a stock-market crash?
D, good point. I never understood why they whined about "Gordon's Brown £5 billion pensions raid" (which was no such thing) when they could quite easily have bought corporate bonds instead.
L, but that 1% is a much higher effective tax rate if they all invest in bonds or gilts (because real interest rate is low on one and zero on teh other).
BFOD, true, but the losses will now outweigh the gains (the bad funds drag the good funds down with them).
P, that is a very good question. Is crashing the stock market an intended or an unintended consequence? Your guess is as good as mine, but either way, it looks pretty stupid.
MW - Absolutely - I was being kind. Clearly the flip side is forcing funds into investing in 'lower' risk asset classes, that is those with a lower expected return.
It's utterly bonkers, except from the 'forcing the schemes to lend to the government' point of view.
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