One of the real problems with the banking and sovereign debt crises is the impact on pension funds. The banks cannot be allowed to fail because much of the money they have is in the form of deposits by pension funds, it is said. That is not actually all that true, so far as I have been able to discover: a great deal of the money put into private pension schemes is in fact held as stocks and shares. That is true because in boom years those assets have risen very sharply (just as housing assets did) and pensions are looking for the highest return. Obviously when the stock market crashes that is a disaster for those pension funds because the pension "pot" which generates the pension loses value dramatically. Since someone who is retiring needs to convert that "pot" into something which will generate income rather than an increase in capital they have little choice about when to make that conversion: and so they do not get what they expected to live on for the rest of their lives. I had asked earlier why I should care if the stock market crashes for a week and then rises since that means the movement is unreal: but it is real if it happens when someone needs to crystallise their pension and so it is indeed a problem for all of us.
The idea of investing pension funds in a casino is ridiculous: yet that is not only what we do, it is what pension funds are pretty much required to do. By law they must look for the best return, just as companies are required to do that for their shareholders. But the highest return is necessarily tied to the highest risk in our current system. Thus private pensions lose value and when they do there is an attack on public sector pensions because they are "pay as you go" systems and do not suffer those losses. The cry is that that is unfair and therefore there is pressure to "level down".
The upshot of all this is that pension funds do little or nothing to support infrastructure spending or any of the other things we would all find useful. In the UK the chancellor has recently recognised this and he has proposed that pension funds should switch their investments to government bonds (ie lend the government money to fund public spending on infrastructure). This is a good aim, marred by the proposed mechanism. At the most basic level, how can pension funds lend to governments if there is a sovereign debt concern? One may argue that they lent to companies and lost out: but they can counter that any given stock market crash was unpredictable (no, really, they can): but in the current climate it is argued right and left that governments may default. With that knowledge I think the fund managers would be open to challenge if they lent to governments. But even if they did, it still increases the debt of government, so far as I can see: and that means increased deficit which we are told is the whole problem we must address.
So I was interested to find that way back in 2003 there was an alternative proposal put forward by Richard Murphy and others.
http://www.neweconomics.org/sites/newecono...es_Pensions.pdfWhat they are proposing is the establishment of pension funds set up and run specifically to invest in infrastructure. The funds would build public assets and rent them to the "sponsoring body" for a fixed period. This would replace the absurd "PFI" scheme. The assets would generate long term and predictable income for the fund, as PFI currently does for private firms. The tax relief which pensions currently attract would be required to go into the fund itself and so woud contribute the pension for the contributor in the long run: and be available for investment in public assets meantime. Direct government borrowing to fund infrastructure woud be reduced and so that money could be diverted to providing decent state pensions, for example. The assets would be owned by the public sector at the end of the period and the fund would not be providing services properly the responsibility of the sponsoring body: so there would be no creeping privatisation. Pension mis-selling would be much harder (that was a big problem in the past and it has been expensive and ineffective to sort it out) and it would not be possible for companies to raid employees pensions or even just plain steal them, as we have seen happen in the past.
The paper envisages a range of such pensions with different sponsoring by public services and non-profits. I am not so concerned about choice, but many people would like to say what kind of public asset their pension contributions would fund and so there is advantage in that: you could choose a fund which spent in the local area, for example, or on the health service.
This seems to me to be a workable idea which would have many benefits: pensions would not longer be so volatile and the amount you are likely to get in retirement would be safe: that is what most people want I think. Meanwhile visible improvement in the quality of life through infrastructure spending would be seen and enjoyed by the people making the contributions. It would seem to be cheaper than PFI and cheaper than persuading pension fund managers to lend to government (though not really: much of the problem with that is non-existent except that the accountancy rules adopted make it a problem - but those are the rules and while we do the indirect route adds to government debt and this does not). It would free up some government money from servicing debt and make it available for other welfare spending
I can't see anything wrong with this idea and much that is right with it. Yet it was proposed in 2003 and nothing was done. Since then we have seen further disasters in the private sector (much bigger than those in the dot.com bubble of 2002) and further erosion of pensions in the private sector used to justify attacks on public sector benefits. It is my view that this government does not want to solve the problems we have: and nor did the previous labour government, equally in thrall to TINA. But it is obvious there are alternatives and they have been put out there in quite some detail. It is time we took them seriously
