Pension funds have survived the economic meltdown and recovered almost all they have lost since 2008, the Organization for Economic Co-operation and Development (OECD) said in a mid-2011 report.
The OECD first presented the good news and then came the forewarning, stating that pension funds are confronted with a number of problems that may affect the long-term health of said funds, such as low interest rates that curtail pension fund earnings, stock market crashes, and the latest accounting and regulatory pronouncements.
The major issue among many with pension funds is that “future obligations become more expensive in today’s terms when low interest rates increase the value of their liabilities. Their financial position worsens, even though an increase in the value of invested assets may mitigate this effect,” the OECD report said.
Missing a Major Point
“People’s retirement savings are a convenient source of revenue for governments that don’t want to reduce spending,” according to an article on the Adam Smith Institute blog, a United Kingdom think tank.
The OECD report misses a major point, which is the likely appropriation by the world’s governments of not just public pension fund surpluses, but also private sector pension funds.
Governments are in deep debt and are eyeing the sources of large funds that are readily available once the appropriate legislation is in place.
A forerunner to this idea is the surplus in the U.S. Social Security Fund, comprising of Old-Age and Survivors Insurance plus Disability Insurance, which was indexed in 1972 by Congress and has been transferred, including the interest payments from the federal government, to the U.S. general fund.
“There is no ‘trust fund,’ just IOUs that I saw firsthand, that future generations will pay—will pay for either in higher taxes, or reduced benefits, or cuts to other critical government programs,” said President George W. Bush in an address at West Virginia University in 2005, posted on the Social Security website.
As of Dec. 31, 2010, the U.S. Social Security Fund had a $2.56 trillion surplus. Alas, this amount isn’t in actual funds readily available for distribution, but in IOUs, just paper, from the U.S. general fund.
“Why rob Social Security? That’s where the money is!” exclaimed an entry on the zFacts.com website.
Taking a Cue From the US
“As most pension schemes in Europe are organised by the state, European ministers of finance have a facilitated access to the savings accumulated there, and it is only logical that they try to get a hold of this money for their own ends,” according to an article on the Adam Smith Institute blog.
In Nov. 2010, the Hungarian government told its citizens that if they wanted to continue to collect their state pension, they had to turn over their personal retirement accounts to the state, which held $14 billion in its coffers. That was not all—they were told that they had to keep paying their premium.
Bulgaria demanded that $300 million in private pension funds be turned over to the state pension fund. Unions went on a warpath, and the Bulgarian government agreed that only 20 percent of these funds would have to be placed into the state pension plans.
In 1999, Poland passed legislation that allowed its citizens to pay into a private sector pension fund. By 2010, Poland’s private pension funds had collected $48 billion. Poland changed its position, given the debt crisis, and enacted legislation that made it easier to move the surplus funds into general government coffers, saving the Polish state about $67 billion by 2020.
In April, “the Polish president signed into law pension reforms which lower the proportion of an individual’s salary that can be paid into private pension funds from 7.3% to 2.3%. The difference will instead be paid into Poland’s national social security scheme (ZUS),” according to the European Pension website.
The Irish folks needed help to fund their retirement, so Ireland established the National Pension Reserve Fund in 2001, designed to hold funds for the years 2025 through 2050. In March 2009, the Irish government confiscated $5.5 billion to bail out banks. In Nov. 2010, the government used the remaining $3.4 billion to ease the country’s economic woes.
The French government used $45.4 billion from its pension funds, earmarked for the years 2020-2040, to pay for short-term pension shortfalls and moved the remainder into its general purpose fund, which will pay for other shortfalls.
“It looks like although the governments are able to enforce general participation in pension schemes, they do not seem to be the best guardians of the money accumulated there,” the Adam Smith Institute advised.
Pension Fund Economic Woes
“The end of September marks the largest deficit since we have been tracking this information [pension plan deficits].” said Jonathan Barry, partner at Mercer, a human resources consulting firm, in its latest press release. Mercer states in its October press release, “Mercer believes that the end-of-month pension funding levels for the S&P 1500 are at a post-World War II low.”
Stock losses and declining interest rates triggered an ever increasing shortfall in the major U.S. pension plans, those that are included in the S&P 1500 Index.
In September, pension plans experienced a $512 billion deficit, a 35.5 percent increase from the end-of-August deficit of $378 billion. The reduction was caused by a 7 percent reduction in corporate stocks and bonds and associated interest rates.
Mercer advised that pension plans may have to curtail lump sum payments or take other drastic measures if pension fund shortfalls continue.
“Pension funds across North America are facing record shortfalls,” according to an entry on the Market Oracle website.
Pension Funds Eyeing Commodity Investments
“So far pension funds globally have little exposure to Gold and other commodities,” according to a recent article on the CommodityOnline website.
Very few funds are known to have invested in commodities, including gold, over the past years, except the California Public Employees Retirement System and U.K. pension funds.The Dutch pension fund Stichting Pensioenfonds Vereenigde Glasfabrieken, holding $423 million in its coffers, was told to reduce its gold holdings from 13 percent to between 1 percent and 3 percent by the Dutch central bank, The Nederlandsche Bank (DNB).
Speaking with the promise of anonymity, managers and trustees of pension funds said they no longer do what is best for their customer, but what they think the DNB wants them to do.
Quoting DNB spokesman Kees Verhagen, a 2011 article on the Pensions & Investments website states, “The DNB has been taking a more confrontational stance against pensions funds to promote ‘a durable business model and a sound culture, supported by equitable governance,’ according to Mr. Verhagen.”