Pensions – a Ticking Time Bomb
Pfäffikon SZ, Switzerland – Today, in general, the world is facing four major challenges. The first is authoritarian rule. With the upcoming European elections, this is a hot topic again. And the shift of the Ukrainian map is a good example. Another point of focus is environmental pollution, which has threatened the global economy. Maybe, as a Dutchman, I should also mention the rising sea level, even though I think Al Gore’s films on this subject have really blown the situation out of proportion. I live high up in the Swiss mountains and am not affected by rising sea levels; however, I always sleep easy behind the Dutch dikes.
Dirty Tricks
Another hot item is, of course, ever-expanding private and public debt. And, as a final point, the world is struggling with healthcare, the associated costs and pension agreements. Maybe the last point may sound strange to your ears because pension funds are apparently well stocked and do not suffer from underfunding. I would like to remind you about how the Dutch government looted the pension funds during the eighties and nineties of the last century. About the dirty accounting tricks employed in connection with the shadowy virtual state pension fund of around 50 billion euros. This affects the compounding factor badly, just ask the Norwegians. This week, the leader of the Dutch Labour Party, Diederik Samson, called for greater investments in the Dutch polder; a good idea that I already suggested earlier.
Flexible Money
As a pessimist, you will always appear smarter than an optimist. I am an optimist. For decades, I have heard hordes of stock market researchers sound like a broken record when talking about gold, the dollar and equities. This week the Dow Jones and the S&P 500 ticked up to a new all-time high, which may or may not have been encouraged by the FED’s flexible monetary policy. Mr Market continues to surprise. If you do your homework, you will know that during the crisis in the thirties of the last century, the FED prematurely stopped stimulating. The rest is history. Janet Yellen – the boss of the FED – does not want to make the same mistake again.
Greyer and Greyer
In any event; the world is slowly but surely turning greyer and greyer. New-born babies ensure – without even realising it – the desired inflation. After all, they do not take part in the production process, but they do cause overspending. However, many countries have reached their demographic peak. And this trend is likely to continue for the next 50 years. In such a scenario, you can fill in the blanks yourself. One consequence could be that pension funds will simply be strapped for cash and be unable to cope with this development.
It may be a coincidence, but recently Ray Dalio, founder of Bridgewater Associates, published a controversial report about pension funds. Dalio is known as one of the most successful quantitative hedge fund managers in history; he definitely knows how to count. According to Bridgewater, approximately 85% of pension funds will fold within thirty years.
Stress Test
Bridgewater came to this conclusion by applying a stress test to U.S. public pension schemes. Many pension funds claim to achieve between 7% and 8% annual return. But even if that assumption was to be correct – which is unlikely in practice – there will still be a deficit of 20%, says Bridgewater. Under the current circumstances, a return of 4% would be more realistic. To continue to meet all requirements, a minimum annual yield of 9% is required. Bridgewater is of the opinion that the vast majority of pension funds cannot achieve this high level of return. This means the coffers will be empty within 50 years. Unfortunately, Bridgewater has yet to release the full report, but he is allegedly planning to do so. I sit patiently waiting.
Whether or not you agree with Mr Dalio’s critique, the fact that the pension industry is facing a challenging time sticks out like a sore thumb. Pension funds have not yet turned the tide in many areas. The aging population, low interest rates, public opinion, to name just a few of the issues. Once, the Norwegians took the Dutch pension system as a starting point. Perhaps now, the Dutch should take the Norwegian pension system as a starting point. We could do without more control from Brussels concerning the carefully crafted Dutch pension funds.
It remains for me to wish you a good weekend.
Jan Dwarshuis is a senior asset manager at Thirteen Asset Management AG, where he is responsible for the Thirteen Diversified Fund. Dwarshuis writes his columns in a personal capacity and is not paid for them. Nor is he paying for his columns to be placed. Professionally, he holds positions in major European, American and Russian stock funds. The information in his columns is not intended as professional investment advice or a recommendation to make certain investments. At the time of writing, he has no position in the above shares and has no intention of doing so in the next 72 hours.
