This month Global Pensions travelled to Ireland to investigate how the pensions industry, in what was until recently known as the Celtic Tiger, is negotiating a period of severe economic tightening.
In the years running up to the financial crisis, most Irish pension funds had high domestic equity biases, and at the time it was pretty hard to argue with this allocation. A more diversified approach, both by asset class and geography, would not have produced the stellar returns that a booming Irish stock exchange could provide, leaving investors glancing enviously over at their richer peers.
However, with the bubble having well and truly burst, pension funds now find themselves requiring a massive rally to repair their funding ratios. Also, pension funds in Ireland are more exposed to sponsor default than some of their international compatriots as there is no lifeboat.
Despite the fact that institutions like the US Pension Benefit Guaranty Corporation (PBGC) or the UK’s Pension Protection Fund (PPF) take serious criticism over their structure, levies and deficit levels, they are none the less a godsend for any pensioner whose scheme enters them. As the ex chief exec of the PPF, Partha Dasgupta once commented to me, “thank god for the PPF!”
There is now serious work being undertaken to ensure that all countries operating in the European Union have some sort of safety net.
I await with interest to see the various schemes that will be devised, though I can guarantee one common factor will be their unpopularity in their local market. Perhaps the simplest solution will be for sponsors to simply pay an insurance premium or tax to the government, who can spend it as they wishes and then come riding to the rescue of failed schemes. This is because, despite the attempts of governments in the UK and US to distance themselves from the problem by, creating agencies like the PPF and PBGC, the implicit understanding is that the government is the ultimate guarantor.
Interestingly it could be argued that this is exactly what is happening in the UK, where the government is receiving a £23bn “windfall” by taking on the Royal Mail Pensions assets and in return assuming the liabilities of all the postal workers.
Another interesting idea that passed across my desk this month came out of a McKinsey report, which demonstrated that workers were more likely to sign up for health insurance when they stood to gain a prize. It was suggested that some sort of lottery might be used to attract pension savers.
Now, some would say there is already a prize for pension savers – they get to have a more comfortable retirement than those who don’t. But it appears that not only do we massively under-estimate our understanding of downside risk, we are massively optimistic about our chances of winning. And clearly we prefer the chance of a potential boost to our income now rather than a more certain but less exciting reward way into the future.
