Pension funds: key issues after the global crisis
Maria Alejandra Caporale Madi
Please cite the paper as:
Maria Alejandra Caporale Madi, (2018), Pension funds: key issues after the global crisis, World Economics Association (WEA) Conferences, No. 2 2018, The 2008 Economic Crisis Ten Years On, 15th October to 30th November, 2018
This paper has been included in the publication
“The 2008 Crisis Ten Years On: in Retrospect, Context and Prospect Paperback”
Pension funds have been playing and will play an outstanding role in the global saving and investment process. However, in spite of the pension funds’ power to centralize huge amount of “savings from workers”, workers do not seem to have a strong defense against the contemporary worldwide trends. By analyzing the impacts of the global scenario on the savings of workers and the future flows of workers’ income, this paper aims to favor a reflection on the pension funds ́ challenges after the 2008 global crisis. Unlike the main discussions on the dynamics of pension funds – that considers short-term market performance – our perspective privileges a long-run perspective. The cutting questions proposed are: How could the low interest rate and austerity policies affect the evolution of the workers ́ savings? How could the pension funds ́ allocation strategies give support to the new short-term business practices of private equity funds? How could the informal economy and youth unemployment affect the future pension funds ́ inflows? The paper addresses that it is crucial not only to re-shape the pension funds ́ regulation in terms of asset allocation but also to re-think public polices related to job creation. Besides, it is urgent to consider pension funds as a public good to create new conventions and institutional set ups that could cope with solutions focused on sustainable livelihoods.
I would like you to add some data about the performance of pension funds as of 2008 and 2017.
Please consider the following data on pension funds.
In 2008, pension funds experienced, on average, a negative return of nearly 20% in nominal terms since the beginning of the year. Pension funds in the United States accounted for most of the loss (USD 2.2 trillion out of the total OECD loss of 3.3 trillion), being followed by the United Kingdom´s (USD 0.3 trillion) and Australia´s (USD 0.2 trillion) pension funds (OCDE, 2008). Indeed, the impact of the financial crisis on investment returns was deeper among those pension funds where equities represented over a third of total financial assets. While Irish pension funds were the most exposed to equities (66% of total assets on average), the United States, the United Kingdom, and Australia also followed this pattern of asset composition.
Consequently, by October 2008, within OECD countries, the total assets of all pension funds declined almost USD 3.3 trillion (20% relative to December 2007). Including other private pension assets (personal pension plans), the total loss amounted USD 5 trillion (OCDE, 2008).
After the global crisis, pension assets in the OECD area have kept growing between 2007 and 2017. Those assets amounted the record USD 43.4 trillion in 2017 – a higher level than the pre-crisis amount of USD 28.2 trillion – while two thirds were held in pension funds that hit USD 28.5 trillion in 2017 . Throughout the last ten years, the largest increases in pension funds´ assets were observed in countries that set up mandatory plans starting and funded occupational schemes (as in Greece). In contrast, the size of the funded and private pension systems turned out to shrink in some countries where pension reforms adopted the pay-as-you-go system, such as Hungary.
Hi Maria, it is a very interesting paper. You say that ” it is urgent to consider pension funds as a public good to create new conventions and institutional set ups that could cope with solutions focused on sustainable livelihoods”. What policy measures could foster such course?
Thanks for your interesting question
Two key trends can be highlighted ten years after the global crisis: a) A shift to defined benefit (DB) pension plans, b) The increasing role of alternative assets, such as private equity funds, among pension assets.
The consequences of these trends are relevant. If the amount liabilities of DB plans keep on growing faster than the amount of assets, the declining funding ratios of pension funds below 100% turns out to be a source of concern. In order to avoid the underfunding of pension funds, financial regulators need to monitor the evolution of funding ratios in order to protect members and sponsors.
In the context of contemporary financial dynamics, Minsky emphasized the need of shaping a thorough agenda of institutional reform so as to control the working of a capitalist economy. Following Minsky, we can say “pension funds cannot be left to the free markets”. As the organization of economic and social institutions helps to define policy goals and outcomes, an agenda on pension funds could privilege changes in financial regulation that could
a) aim to favor hedge financing in pension funds regarding the weight of equities, bonds and alternative investments in total assets;
b) articule alternative investment strategies in the private equity industry with job creation.