Are Your Pensions at Risk?
Fund managers take drastic measures.
The PBGC collects insurance premiums from pension funds in return for standing behind retirement payouts if a pension plan is ended. It also makes investments in the capital markets to cover payments to around 612,000 of the 44 million retirees it protects. Although the organization was established by the U.S. government, it receives no federal support and carries no implicit guarantee.
According the director of the PBGC, Charles Millard, the fund is "chronically underfunded" and the purpose of the new strategy is to "avoid a taxpayer bailout." He acknowledges that the only other option if the fund is not able to raise additional capital from employers or taxpayers is to slash retirement benefits, a move he calls "unacceptable."
In response its potential financial troubles, the fund is drastically changing its investment philosophy. It plans to roughly double its investment in equities to 45% of total assets, but claims the strategy will be less risky because the investments will be spread among different asset classes.
Sandwiched between various nationalization headlines, the news caught Minyanville Professors' attention.
Check out this morning's real time discussion on the Buzz and Banter:
Risk Management – Mr. Practical – 9:37 AM
I was recently sent a link to this article from the Financial Times. This illustrates a real mis-understanding of just about every tenet of risk control there is.
Any money manager is really a risk manager. There are a few tenets of managing risk that are essential to making money over the long run. Essentially a risk manager's job it to create an option on profits. This is done by allocating in such a way as to protect finite capital (if capital is infinite there is no need to manage risk; this is what we are seeing by central banks when they nationalize). To protect finite capital a risk manager will use the Markov chain: an algorithm that basically allocates more capital to a trade of equal probabilities when overall profits are up. When losses are incurred capital is reduced until those losses are overcome.
Even the most inexperienced of us can see that this manager is doing the opposite: he is risking more when losses have occurred or even worse because they have occurred. This is akin to a gambler doubling down on losses, something the pit bosses in Vegas LOVE to see.
Here is another reason why capital markets will relentlessly fix all these huge imbalances that exist in our brave new macro economic world. One imbalance is money managers that exist that have no right to be a fiduciary.
Gate Sniffage – Todd Harrison – 9:52 AM
Other big news this morning? The Pension Benefit Guaranty Corporation, the government sponsored body that insures the pensions of 44 million Americans, will dramatically increase their risky investments such as equities and real estate. As Mr. Practical mused below, this is akin to doubling down after a string of bad bets.
Govie Fund Trial Balloon – Minyan Peter – 10:08 AM
On the PBGC's announcement, I view this as a trial balloon with Congress to test political support for the conversion of various government funds, such as the FDIC insurance fund and Social Security, which have historically invested in US government debt securities, into full-fledged US "sovereign wealth funds".
Given current Treasury yields, the need for additional capital into the banking system, not to mention protectionist concerns related to foreign sovereign wealth funds, I think the timing for such a conversion is ideal.
PBG Just a Drop in the Bucket – Jason Goepfert – 10:26 AM
Is it just me, or does the Pension Benefit Guarantee news seem way over-hyped?
Looking at their latest annual report, PBG had about $68 billion in assets. Increasing their equity allocation from 28% to 45% as announced would mean about another ~$10 billion flowing into the equity market.
Given that the market cap of the S&P 500 is around $13 trillion or so, and assets sitting in money market mutual funds are around $3 trillion, $10 billion doesn't seem like a whole heck of a lot.
The only real impact, as Minyan Peter alludes to, would be that they are just testing the waters for further allocations from other gov't sources.
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