Clamping Down on Pension Bets?

Leo Kolivakis's picture

Via Pension Pulse.

Norma Cohen of the FT reports, Regulator plans clamp on pension bets:

Pension funds will be prevented from investing in risky assets, including stocks, 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.”

Some schemes were so underfunded their only hope of recovery lay in big bets. The regulator was also concerned about standards of governance, particularly for smaller schemes.

“We come across a fair degree of criminality at the smaller end of schemes,” said Mr Norgrove, whose six-year tenure at the regulator, created in 2004, is drawing to an end.

Investment curbs would affect a few weak companies initially but as schemes close to new members and to future accruals trustees will need to insure that the investment strategy takes as few risks as possible. “Eventually it will move up the scale,” he said. Companies will need to be well funded and have few, or no, investment risks.

Under those circumstances, defined benefit schemes might cease to be significant investors in equities and property.

Mr Norgrove said that despite cash injections from employers, defined benefit schemes today are not much better funded. “Contributions have had to run to keep up with rising longevity, falling discount rates and shortfalls in investment returns,” he said. “We clearly can’t have a situation where we move from recovery plan to recovery plan.”

Pensions agency head weighs risk and reward

As David Norgrove, the first chairman of the UK Pension Regulator comes to the end of his term, Britain’s retirement landscape is radically altered from its condition when he first arrived in 2005.

Nearly 60 per cent of defined benefit schemes are closed to new members – up from 44 per cent when he first began counting them in 2006 – and 21 per cent are closed to future benefit accrual, up from 12 per cent at that time. And Britain is about to embark on a universal system of near-compulsory pension provision where every employer will need to offer workers a chance to contribute to a savings pot for retirement where none existed just a few years ago.

Moreover, about 150,000 people had lost all or part of their pension when the legislation that set up the regulator was passed in 2004. Almost none have lost their benefits since.

But some things have not changed, Mr Norgrove notes in remarks prepared for an address to the National Association of Pension Funds on Tuesday.

“Schemes are only marginally better funded then when the scheme specific funding regime was introduced five years ago. Despite everyone’s best efforts, the economic conditions have largely counteracted the gains that schemes had started to make before the downturn,” said Mr Norgrove, who steps down at the end of this month.

Thus, in his parting shot, Mr Norgrove is hinting at the imminent death of one of the sacred cows of defined benefit pensions; that investment in risk assets – equities, property, commodities or hedge funds – can reduce overall risk and make defined benefit retirement promises affordable.

Indeed, he goes so far ... as to say that woefully underfunded schemes of companies with weak balance sheets should have their investments in risky assets limited. Schemes such as these “can only hope to meet their promises by taking very high levels of investment risk with significant potential to go wrong”.

The regulator, he said, must make sure that those deficits get no bigger than they already are. And that means cutting investment risk. But as schemes close to new members, and increasingly, to future accrual by existing members, employers have little vested interest in the welfare of the scheme. Increasingly, he said, these will be run by elderly member-nominated trustees and these, too, will have to curtail investment risk. And trustees will need to be aggressive in pursuing contributions.

Although Mr Norgrove did not say so specifically, the landscape he describes is one where pension fund investment no longer props up stock markets.

In his parting remarks, Mr Norgrove also took aim at two of the most sensitive issues for industry. First, he reiterated the regulator’s view that trustees must carefully monitor offers from employers to scheme members for “enhanced transfer values”, which are very often a bad deal for members. Pensions advisers have been fighting back hard to make it easier for employers to reduce retirement obligations by offering ETVs.

The regulator, he said, believes there are a handful of instances where accepting one might be beneficial – where the member cannot expect to live too long or has no dependents who will benefit from defined benefit pensions, for example. Also, if the offer is significantly superior to insurance cover provided by the PPF, a transfer might make sense.

Second, Mr Norgrove made it clear that defined contribution benefits, which are emerging as the dominant retirement savings scheme, need work. A new consultation on structure will be aired next year, he said.

But for now, he said, the myriad small schemes which dominate DC pension provision are not likely to serve the interests of savers well.

“What we don’t want is another 50,000 DC schemes,” he said. “They don’t have the scale for the governance and they don’t have the scale to keep the charges down.”


Is Mr. Norgrove right to limit risky bets by small underfunded pension
plans? I think so. Taking risky bets to make up for losses might sound
perfectly fine, but it could easily backfire, especially if we head into
a protracted period of debt deflation.

A colleague of mine
remarked that in the last ten years, JGBs outperformed the S&P 500.
And yet 10-years ago everyone was screaming about how low Japanese bond
yields were and many hedge funds were actively shorting JGBs. They all
got slaughtered, and more will get slaughtered shorting Japanese bonds,
even now.

But isn't the Fed giving money away to banks so they
can trade risk assets all around the world? Shouldn't pension funds also
be allowed to take huge bets? That all depends on the internal
expertise of the pension fund managers, on their risk management
process, and most importantly, on their governance.

I'm not
saying to go all in government bonds just in case debt deflation hits,
but it's simply foolhardy to think that investing more in alternatives
will help shore up these pension funds. All this to say that sometimes
it's worth bucking the trend and playing it safe. I know hedge funds,
commodities, real estate and private equity sound sexy, but the truth
is it's a lot sexier to limit your downside risk, especially if you're a
small underfunded pension plan paying out benefits.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
edmondantes's picture

Pension funds are in deficit because the discount rate is low. The discount rate is low because interest rates have been artificially suppressed by the corrupt oligarchy in a desperate attempt to keep asset prices high to bail out their chums in the hugely overleveraged banking sector and also to sustain the government bond market so they can continue to fund their gigantic deficits at ridiculously low interest rates in order to keep their welfare clients happy. 

Mr Norgrove is either a cretin who completely fails to understand any of these obvious facts or he is a slimy bureaucratic appointee whose role is (despicably) to find a pseudo-scientific justification for stealing private pensions by forcing them to be invested in 'safe' government bonds (thereby further enabling the bankrupt government to continue funding its gigantic deficits).   

What is likely to happen is that this cretin or others like him will force pension funds to invest 100% of their assets in UK gilts. Then hyperinflation will come and will wipe out the value of the gilts and of the fiat money in which they are denominated. Then 99% of the population will be left without any private pension provision thereby making them paupers who are totally dependent on the state.  

Thereby the private pension funds will have been transferred to the rent-seeking parasites running the state and subsequently the people will have been enslaved.  

A cunning plan.

Leo Kolivakis's picture

So it's better for them to invest in hedge funds, private equity and real estate and hope for the best?

Mercury's picture

At this point it's a lose-lose.  In a ZIRP world there isn't much yield to earn plus there's a substantial likelihood those meager earnings won't be sufficient to prevent inflation/currency debasement from eroding principal.

Tic tock's picture

But is there such a tangible concept as 'risk-free investment'? -unless my understanding of finance is deficient, it would have to be based on a central bank model!

akak's picture

No, your understanding is in no way deficient. The concept of "risk-free investment", as peddled by the sociopathic oligarchy and their lackies, is a ludicrous fraud purposely designed to instill confidence in the power and putative omnipotence of the State and its financial health. It is nothing whatsoever but a modern, if vastly more expensive, version of snakeoil.

dizzyfingers's picture

Zero risk = zero return?

Leo Kolivakis's picture

Do you know what the total return of JGBs were during Japan's lost decades? What about the Topix? You obviously have no clue!!!

akak's picture

But you are of course only thinking in NOMINAL terms, as a good pro-establishment sheep is taught.  In reality, the holders of JGBs made little if anything above the REAL rate in the rise of the cost of living.  That may qualify as "not losing" one's initial capital, but it is still a piss-poor return.

Leo Kolivakis's picture


So what was the REAL return of JGBs? Japan suffered DEFLATION, not inflation. Please explain your logic to me...

akak's picture


You are clearly not just meekly swallowing the Establishment's poisoned Koolaid, you are positively drowning in it.  If you truly believe that Japan "suffered" from real deflation over the last 20 years (even while, somehow, mysteriously, the true cost of living in Japan did NOT fall but in fact ROSE during that period), then please get back to me at --- I have a bridge for sale in Brooklyn that may interest you.

And for the last time, there has NEVER been ONE case of honest-to-god deflation under a purely fiat monetary regime, EVER!  Any lies to the contrary are just more government propaganda designed to fool the gullible and weak-minded, i.e., the majority.  Count yourself among that herd, Leo.

Hook Line and Sphincter's picture


You truly are such a party pooper...a real fiesta flatulator. Won't you just go away and let Leo enjoy his delusion. 

What? It's not like we all haven't sat on our hand to make it numb, pulled down our chonies and imagined Margaret Thatcher treating us right.

akak's picture

Dammit, you made me spit out my cheap Shiraz/Grenache blend!  OK, on second thought, not such a great loss.

I consider it my personal mission in life to separate Leo from his delusions.  It is a herculean task, but I bear it stoically, and while thus engaged enjoy my own quiet satisfaction from the thankless task.

Hook Line and Sphincter's picture

You are indeed, a better man than I. Leo is rather adorable in that favorite dog that dumps the trash can over kind of way.

At the moment though, I'm leaps ahead of you on the refreshing libation... second glass of Storybook Old Vine Zin going down. NE o' Napa u know.

akak's picture

Ah, old vine zins --- almost always at least very good, as idiosyncratic as they can be.

Have a bottle of Opus One 2004 that I am going to enjoy tomorrow at dinner with some coq au vin made with various wild mushrooms that I gathered this past summer ----  but that particular wine will NOT be going into the dish, however!

honestann's picture

Just wait until every pension on earth wakes the frack up and invests 90% of their assets in physical silver and gold.

SilverRhino's picture

I'm thinking that that will happen a few times right up until the first pension manager starts getting anal probed from the IRS/Justice/SEC regarding "excessive" speculation.  

TPTB will not tolerate certain institutions abandoning paper. /cynicism

Hook Line and Sphincter's picture

Pondering what the hell isn't high risk but perhaps Gold when I had an possessed Zbigniew-induced thought that the Fed would re-purpose POMO to deal the banks into direct purchase of PM's instead of stocks, shake the weak and strong hands out alike by the ensuing stellar prices, continue to increase the M3 by 20x, leave the proletariat with their schnitzel hanging flaccid (or blown off from a good war or two), and commence a new and improved global usury scam.

kaiserhoff's picture

So what's a non-risky asset, UK bonds?  Stupid is as stupid does.