Part II: Marooned!
Marooned, by Howard Pyle (1909)
Source: WikiCommons
I am monarch of all I survey,
My right there is none to dispute;
From the centre all round to the sea,
I am lord of the fowl and the brute.
– “The Solitude of Alexander Selkirk”, by William Cowper
*Dear C&C sub,*
To be “made governor of an island” sounded pretty good to me the first time I heard the expression. It brought up the images of sunshine, sand, and solitude to mind, with a mild “tax haven” vibe to boot.
In fairness, the phrase does indeed mean sun, sand, and solitude. Just an awful lot more of it than anybody not suicidal would want.
It’s a euphemism for the pirate practice of marooning, in which unwanted members of pirate crews, often following a mutiny, would be abandoned on desert islands. Condemned to desolation, they’d be scarcely supplied with rations and a pistol to shoot themselves with and left for dead (the taxman certainly wasn’t going to be making an appearance, so I suppose it does retain a “tax haven” vibe somewhat).
While the degree of harshness will hopefully not be so extreme, the concept of marooning may well become familiar to the victims of the coming pension crisis: abandoned by a mutinous majority and left behind, with little recourse, supplies, or hope of rescue.
The question is, who will be the marooned, and who the marooner? Will the millennials seize the pension benefits off limits to them, taken off the table almost as soon as they started working, from their elders? Or will the boomers find a way of keeping the pension benefits they promised themselves, and leave the millennials to fund them?
Will it be the boomers who are marooned, with retirements ruined, and pension promises simply broken? Or shall it be the millennials, left to a retirement desolate of the support their parents received?
For the moment, it would appear to be the latter – but the mutiny has yet to occur, the unrest only now beginning to echo out from below deck.
To illustrate what this future may look like for the developed world, let’s turn to Christopher Ailman, the chief investment officer for “Calstrs” the California State Teachers’ Retirement System. Though he manages almost $250 billion in assets, that just ain’t gonna be enough. Due to no interest rates and increasing life expectancy, “We just have to explain to millennials that their parents might have to move back in with them”…
If you’re sceptical about the sheer scale of this problem, bear with me.
Mercer, the global pension consultancy, ranks only two countries in the world as having a first class pension system: the Netherlands and Denmark.
You’d think that an “A” rating on their pension schemes would mean the Danes and Dutch don’t have to worry about a pensions crisis. But you’d be incorrect, such is the weight of pension underfunding.
From the Financial Times:
The Dutch government is trying to avert a crisis in the country’s €1.6tn pension industry, with millions of pensioners facing cuts in their retirement income for the first time next year…
Shaktie Rambaran Mishre, chair of the Dutch pension federation, which represents 197 pension funds and their members, said that contributions might have to rise by up to 30 per cent over the next few years. “As things stand, around 2m people are facing cuts from next year,” she added.
I would encourage you to take amoment and reflect on the fact that the top-graded pension system in the world is requiring a 30% increase in contributions.
And our pension system here in Blighty (meaning public and private pensions and their liabilities) is nowhere near an A. We’re a C+, a grade diplomatically described by Mercer as: “A system that has some good features, but also has major risks and/or shortcomings that should be addressed. Without these improvements, its efficacy and/or long-term sustainability can be questioned.”
The US stocks have had such a strong rally for the last decade and US bonds still yield more than Europe’s… but of the top 1,500 companies in the US, there is currently a pension funding deficit of almost $400 billion. They’re a C+ in Mercer’s book too.
Interestingly, even if everybody just bites the bullet and pays the extra contributions required to keep pensions solvent, this still creates problems. If people set more and more aside to fund retirement, they spend less on consumption – and it’s consumption-led growth that we’re relying on to make sure the economy keeps growing and keeps debt, the great sword of Damocles hanging above our entire fiat system, at bay. In trying to stimulate consumption by cutting interest rates, central banks can create the opposite.
It should also be stressed that all of these problems are arising in an utterly benign environment for global asset prices: they just keep going up. If some start going down with regularity, the funding status for all those pensions becomes a lot more precarious. Perhaps during such a bear market, interest rates would rise sufficiently to give pension funds some breathing room, but considering central bank policy is now to shoot any interest rate on sight, this is more of a hope than anything else. Inflation would be required to let the interest rates run wild, and that ain’t showing up… yet.
There’s also the dynamic that pension funds used to be a stabilising force within financial markets, but now they risk becoming the opposite. Their long-term perspective, great size, and significant cash piles meant that they were often buyers during stock and bond market crashes, halting falling prices.
Such is the demand for private assets, that new systems are being created to log them all. With a crypto backing, no less – from Reuters:
HSBC aims to shift $20 billion worth of assets to a new blockchain-based custody platform by March, in one of the biggest deployments yet of the widely-hyped but still unproven technology by a global bank.
The platform, known as Digital Vault, will give investors real-time access to records of securities bought on private markets, HSBC (HSBA.L) told Reuters, and seeks to capitalize on booming interest in such investments by yield-hungry investors…
The HSBC platform will digitize paper-based records of private placements, using blockchain to reduce the time it takes investors to make checks or queries on holdings.
Records of so-called private placements are typically held on paper and lack standardization, making access tricky and time-consuming. HSBC currently looks after up to $50 billion worth of the assets, it said.
…Demand for private placements of both debt and equity have grown significantly in recent years, as investors search for higher returns amid low interest rates worldwide and technology firms in particular shun the scrutiny of public markets.
HSBC expects the global value of private placements to hit $7.7 trillion by 2022, a jump of 60% from five years earlier. Over the same period, it thinks allocations by asset manager clients will grow to 20% from 9%.
Pension funds have also got into the derivative space in a big way, in an attempt to hedge interest rate risk and gain income by selling insurance that the market won’t fall. This adds yet more risk that in a bear market losses will be more severe, in turn making the chances of a generational mutiny over pension plunder likelier.
It is also worth noting that if central banks or government treasuries purchase pension funds’ assets to keep them solvent, that this would still lead to generational mutiny as it would keep the price of those assets prohibitively high and paying little in returns. So what is one to do, to avoid or survive a mutinous marooning when the pension crisis reaches a tipping point?
Alexander Selkirk, a man from Fife (a land known simply as “the Kingdom” by natives, followed promptly by the statement “I’m the king” if they’re male), was one of the few who survived the punishment of marrooning. He became becoming a proficient hunter and scavenger upon his desert island, surviving for four years and four months until being rescued by a friendly passing ship.
His desolation would inspire the character of Daniel Defoe’s Robinson Crusoe, not to mention the poetry by William Cowper that graces the top of this email.
I said yesterday that pension promises are similar to promises of plunder from a pirate captain. While captain’s needed a crew to set sail, politicians need votes to get elected, and companies seek your labour to function.
But you should not rely heavily upon or even trust such promises from any of the above. You should resist placing your future so firmly into somebody else’s hands in exchange for a promise, be it from a government, a company – or a pirate captain. Your financial future, including your retirement, is your responsibility, and nobody else’s. By all means, take advantage of their promises – just make sure you’re not a slave to them.
You’re the captain here, the “monarch of what you survey” as Cowper so eloquently put it, and it’s up to you to ensure that what you’re not a marooned monarch, with little to survey but a hollow island if those promises are ever broken. Retain your financial sovereignty; do your research, make your own investment decisions, and ensure that it’s you at the helm, steering your finances – whatever weather the future throws our way.
I’ll be back next week. In the meantime, I wish you a great weekend.
All the best,
Boaz Shoshan
Editor, Capital & Conflict
PS In yesterday’s letter I made an error, noting that university employee pension contributions were 8% of their salary at the beginning, and 9.6% later on. Only the latter is the correct figure – my apologies.
Category: Market updates