Around the world, there are millions of workers and retirees who are counting upon pensions set up by corporations and governments to provide for their retirement security. These individuals believe they have been “promised” certain benefits and that promises made will be kept.
Unfortunately, many pensions are severely underfunded, i.e., not enough money has been set-aside to pay benefits promised. Further, the money in these pensions is all-too-often grossly mismanaged—what I refer to as “gross malpractice generally practiced.”
That’s right—with respect to pensions, “prevailing practice” generally amounts to “gross malpractice.”
To make matters worse, there are legions of actuarial and benefit consulting firms globally that make handsome livings advising pension plan sponsors on how to legally (and sometimes not-so-legally) improve their bottom-lines by slashing or outright eliminating their pension obligations, i.e., how to break the retirement promises they have made.
As a result, pensioners cannot count upon their plans to honor benefit promises; to the contrary, they can only count upon sponsors doing what’s best for their bottom-lines, i.e., working diligently to screw workers out of promised retirement benefits.
Sadly, there is virtually no one protecting pensioners from mismanagement and pension looting. Government regulators and law enforcement are either conflicted or simply not up to the task of safeguarding retirement plans from the ravages of Wall Street billionaires and plan sponsors.
As I explain in my book Who Stole My Pension?, pensions around the world are at risk.
This past week, the United Kingdom saw the near-collapse of, according to some experts, nearly 90% of its pensions holding £1.5 trillion in assets.
What happened is that a government-policy induced a pension crisis in the U.K. over what’s called liability-driven investing (LDI). LDI is a strategy that helps corporate pensions match their assets to their liabilities.
Newly installed Prime Minster Liz Truss’ government unveiled a plan to cut taxes (financed by an increase in government debt of £72 billion) amid rising inflation, which pushed the country’s bond market into crisis territory. Yields on U.K. government bonds rose sharply, and this in turn triggered margin calls, which many investors tried to meet by selling more bonds, causing a chain reaction. The Bank of England then instituted an emergency intervention—an approximately £65 billion bond-buying program, doled out in daily injections of £5 billion until October 14 in order to halt a collapse of the bond market.
The U.K.’s pension regulator also called on trustees of defined benefit schemes and their advisors to review the “resilience and liquidity of their investments, risk management and funding arrangements, and plan accordingly.”
This week the Bank of England acknowledged that funds came under severe strain with many in danger of going bust.
Let me emphasize, this was a government-induced pension crisis.
This would be comparable to our government engaging in tax cuts at this time of Federal Reserve tightening. This exact scenario is unlikely to be repeated in the U.S.
What happens in the U.K. hopefully stays in the U.K.
Still, the U.K. near-meltdown may be a canary in the coal mine for pensions globally.
In a recent comment on the U.K. crisis, Wall Street Journal columnist James Mackintosh wrote that it had sent a shock wave through global markets. It is “providing a warning to governments everywhere of the dangers of the new economic era we are entering,” expressed in Britain through a toxic mix of politics, inflation and higher interest rates.
Let’s be clear: America’s already severely underfunded private and public pensions are in extreme danger today. Red flags abound.
While different from the U.K., America has its own “toxic mix” impacting its pensions.
To begin with, the PBGC—the federal government agency which protects the pension benefits of nearly 40 million Americans in private-sector pension plan is itself insolvent.
So much for government protection of your corporate pension.
Our nation’s state and local government pensions have embraced secrecy more than ever, eviscerating state public records laws. Today, virtually all information regarding pension investments is withheld from public scrutiny, particularly information related to high-risk private equity and other so-called “alternative” investments. Remarkably, despite technological advances in the dissemination of information, public pensions are less transparent today than 20 years ago—thanks to Wall Street.
American pensions are gambling more than ever (as much as 30% or more of their assets) in high-risk, high-cost alternatives that have long performed poorly. The performance of these investments has been inflated and the dismal actual results concealed from public scrutiny. Likewise, investment fees and expenses are understated, as are the true percentages of assets at risk.
Leverage, or borrowing at U.S. pensions is also greater than ever and is not properly disclosed to the public. Most pensions do not even know how much leverage is in their portfolios. They’re not monitoring the extent of their borrowing. That’s beyond imprudent—it’s reckless.
Politicians who lack any investment experience, such as Florida Governor Ron DeSantis and Texas Governor Greg Abbott, are increasingly calling for state and local government pensions around the country to fully embrace their political agendas and abandon prudent investment practices.
That’s what I call “politicization of the investment decision-making process.” When politics determine which investments are selected, investment performance always suffers, I have observed over the past 40 years in my forensic investigations of over $1 trillion in retirement plans.
Thousands of America’s corporate pensions have already failed and been taken over the PBGC. Yet in my meetings with the most senior officals at PBGC over the past two decades, no one has ever expressed any interest in investigating the causes of the failures or, God forbid, actually holding those parties responsible for the demise of pensions accountable. Examining why pensions fail and holding wrongdoers accountable are critical to preventing future corporate pension failures. Likewise, public pensions are so entangled with local politicians that neither state Attorney Generals, law enforcement nor federal and state regulators dare investigate potential wrongdoing.
Given the lack of public access to information which would expose gross malpractice generally practiced at our pensions; the limited rights of pensioners to address such wrongdoing under current law; the absence of effective regulation; and the willingness of our elected officials (0n both sides of the aisle) to do Wall Street’s bidding, expect to our nation’s pension crisis to continue to grow in the months and years to come.