Nov 29, 2010
If the recent Hungarian “appropriation” of pension funds, and today’s laughable Irish bailout courtesy of domestic pension funds sourcing 20% of the “new” money was not enough to convince the world just how bankrupt the entire European experiment has become, enter France. Financial News explains how France has “seized” €36 billion worth of pension assets: “Asset managers will have the chance to get billions of euros in mandates in the next few months for the €36bn Fonds de Réserve pour les Retraites (FRR), the French reserve pension fund, after the French parliament last week passed a law to use its assets to pay off the debts of France’s welfare system. The assets have been transferred into the state’s social debt sinking fund Cades. The FRR will continue to control the assets, but as a third-party manager on behalf of Cades.” FN condemns the action as follows: “The move reflects a willingness by governments to use long-term assets to fill short-term deficits, including Ireland’s announcement last week that it would use the country’s €24bn National Pensions Reserve Fund “to support the exchequer’s funding programme” and Hungary’s bid to claw $15bn of private pension funds back to the state system.” In other words, with the ECB still unwilling to go into full fiat printing overdrive mode, insolvent governments, France most certainly included, are resorting to whatever piggybanks they can find. Hopefully this is not a harbinger of what Tim Geithner plans to do with the trillions in various 401(k) funds on this side of the Atlantic.
More from FN on how first France , and soon every other socalized pension regime, will continue to plunder a nation’s life saving to fund short-term deficits:
The decision has prompted a radical restructuring of the FRR’s investments. The new strategic investment plan, which will be released in the new year, will see a rapid reduction in its 40% allocation to equities and a shift to cash and short-term government bonds, according to a source close to the situation.
There will be a focus on liability-driven investment, where asset managers are told to minimise risk by matching assets closely to liabilities.
The transfer of the FRR’s assets to Cades is controversial. Force Ouvrière, a trade union confederation, accused the government of “provoking the clinical death” of the FRR.
The decision was taken within the context of this year’s pension reform, which provoked riots with its decision to raise the retirement age. The state old-age pension system, the Cnav, is in deficit, and responsibility for financing the deficit rests with Cades.
The government is requiring the FRR to pay €2.1bn a year to Cades to meet this obligation.
In other words, pension capital will now be used by perfectly rational third party managers to bid up sovereign bonds. Brilliant.
An asset manager said: “Clearly, the move creates new opportunities, because the French asset management market will be reshuffled because of the changes.
But it is also a step back because there are very few French capitalised pension schemes, and the experience around the FRR, the richness of the asset management and the opportunities it created will disappear in a few years.”
And elsewhere, in the UK, things in the pension arena are also starting to heat up as the country is preparing to launch an “auto enrolment” feature for workers, whereby up to 11 million will be eligible for automatic enrolment.
Trades Union Congress general secretary Brendan Barber hailed it as an “historic advance”: a minimum pension to go with the UK’s minimum wage. Pensions Minister Steve Webb confirmed last month that all employers would have to enrol staff into a company scheme. As a result, up to 11 million people will be eligible for automatic enrolment in a workplace scheme, with up to eight million of them saving for the first time. However, there is little evidence that employers are ready for it.
And judging by the Hungarian, Irish and French case studies, all monies auto deposited will soon find a new mandate: one of bidding up sovereing European bonds. More from Financial News :
Staff can opt out to avoid mandatory contributions that will eventually account for half of the minimum of 8% of salary, with employers contributing 3% of salary, and 1% coming from tax relief.
It is impossible to predict how many people might opt out, but Colin Tipping, head of institutional wholesale at asset manager BlackRock, points to an 80% take-up at US companies that have introduced auto-enrolment compared with less than half of that before the mechanism was introduced. The latest annual review of New Zealand’s national KiwiSaver scheme has an opt-out rate of 18%.
The European experience is less encouraging. Italy tried to boost private pensions saving in 2007 with reforms to the Trattamento di Fine Rapporto, a fund traditionally paid to workers on leaving an employer.
However, its policy of “silent consent”, which had the money transferred into a pension unless workers objected, saw only about a quarter participate. Tito Boeri, director of the country’s social policy reform group Fondazione Rodolfo Debenedetti, said: “It was a great opportunity to develop private pension schemes here, but to a large extent it failed.”
Our only question: how soon before the US administration takes this hint of what every proper socialist country does with funds apportioned to it by a gullible public and ends up investing trillions in the worst possible asset classes (while in Europe this obviously means sovereign bonds, in the US by and far the proceeds will be used to make further purchases of such equities as Apple, Amazon and Netflix, in whose continued successful ponziness lies the fate of a vast majority of US-based hedge funds, whose LPs may at some point, in the distant future, actually pay domestic income tax).