Last Friday, I talked about how Finland's State Pension Fund is getting ready to invest hundreds of millions directly into corporate bonds.
Today, IPE reports that Dutch pension funds are invited for bank rescue talks:
A group of pension funds and insurers have today taken part in talks between banks and the Dutch ministry of finance about a €200bn guarantee scheme for the Dutch banking sector.
IPE understands a number of large, though unnamed, funds and insurers attended the talks in the Hague today.
According to Dutch media reports, the talks were designed to better enable banks to issue bonds by letting the Dutch state guarantee their redemption with a €200bn guarantee scheme.
Gerard Riemen, director of the Dutch association of industry-wide pension funds, commented he knew of the talks though said he could not name which pension funds were involved.
A lack of trust has caused investors such as pension funds to become reluctant to buy unsecured debt securities of banks.
Why should they trust banks? Do they know what toxic debt is still left on their books? Worse still, according to the Congressional Oversight Panel, the bailout of banks is non-transparent and there is absolutely no accountability.
Here is something else to think about. According to the Bank of International Settlements (BIS), bank rescue packages transfer risks to governments resulting in mounting public debts:
The Bank for International Settlements (BIS) is often called the "central banks' central bank", as it coordinates transactions between central banks.
Back in December, Brian Lenihan, the Minister of Finance in Ireland confirmed the government could use the Irish National Pension Reserve Fund (NPRF) "in certain circumstances" to shore up its banking industry and financial system:
BIS points out in a new report that the bank rescue packages have transferred significant risks onto government balance sheets, which is reflected in the corresponding widening of sovereign credit default swaps:
The scope and magnitude of the bank rescue packages also meant that significant risks had been transferred onto government balance sheets. This was particularly apparent in the market for CDS referencing sovereigns involved either in large individual bank rescues or in broad-based support packages for the financial sector, including the United States. While such CDS were thinly traded prior to the announced rescue packages, spreads widened suddenly on increased demand for credit protection, while corresponding financial sector spreads tightened.
In other words, by assuming huge portions of the risk from banks trading in toxic derivatives, and by spending trillions that they don't have, central banks have put their countries at risk from default.
Remember, in the U.S., the Fed is taking toxic assets as collateral for loans, and even a freedom of information lawsuit from Bloomberg has not forced Bernanke and the boys to reveal what kind of derivatives and other junk the Fed is mopping up.The report from BIS confirms the previous statement that central banks were watching credit default swaps as the single most important economic indicator.
The Irish government should think twice about using pension monies to shores up its banking system, especially now that Anglo Irish Bank has become Ireland’s Enron. Moreover, Ireland could face a similar downgrade of its sovereign debt just like Greece did this past week:
His comments followed the publication of a recapitalisation proposal put forward by the Irish Association of Investment Managers (IAIM) last week to combine private investment from institutional investors – including large pension funds – with investment by the State.
After a meeting with representatives from the banking institutions covered by the government's guarantee scheme on Friday, Lenihan issued a statement in which he revealed an assessment of the institutions had determined the capital position of each one to be "in excess of regulatory requirements as at 30 September 2008", and said even in "certain stress scenarios" the capital levels will remain within these requirements up to 2011.
Despite the findings of the report, the minister for finance admitted "international capital market expectations in relation to capital levels in the banking sector have altered", and pointed out for some institutions the additional capital needed "may be very modest, whereas for others the need may be greater".
He said some institutions are already in discussions with potential investors while the Bank of Ireland (BoI) confirmed in November it had "received unsolicited approaches from a number of parties wishing to make an investment in the Group, adding "no decision on these approaches has been made".
Lenihan confirmed "in certain circumstances it would be appropriate for the State, through the NPRF or otherwise, to consider supplementing private investment with state participation, where in doing so the aim of securing the financial system can be better met".
He also added State involvement "will be assessed on a case-by-case basis in view of the overarching objective to preserve financial stability", and in line with EU state aid rules and best practice.
Confirmation that the government is considering using the NPRF to shore up the troubled banking system has supported by trade unions, such as Unite, which pointed out the NPRF invests in 170 banks of which only four are Irish.
Jerry Shanahan, Unite national officer and member of the ICTU banking group, said: "The government is standing by, allowing rumour and speculation concerning private equity and sovereign wealth fund (SWF) investment to destabilise our banks and to create massive uncertainty among staff and management at the banks.
"If it is deemed perfectly acceptable to invest our NPRF in 166 overseas banks, we should ask why it seems so uncertain to act swiftly in a domestic crisis. The minister for finance has it within his power to act today to send these economic vultures' packing and use the NPRF as the basis for producing solutions to the current difficulties," added Shanahan.
Meanwhile, Larry Broderick, general secretary of the Irish Bank Officials Association (IBOA), said: "Surely it is not unreasonable to suggest that some or all of the €1.5bn in cash it [the NPRF] has available at present not to mention the additional funds it holds elsewhere – could be invested in the Irish banking system. Likewise Irish-based pension funds – which already have a major stake in the Irish economy – should also be persuaded to provide further support for Irish financial institutions."
That said, calls for pension funds to rescue the financial sector have been followed by reports claiming a number of defined benefit (DB) schemes are on the verge of collapse because of stringent funding rules.
Turlough O'Sullivan, director general of the Irish Business and Employers Confederation (IBEC), said: "It is time that the government and the Pensions Board as the regulator, faced up to the serious difficulties that DB pension schemes are facing. The current obligation on schemes to be 100% funded on a discontinuance basis is not sustainable."
The rules currently require pension schemes to be able to meet all of their liabilities should the pension scheme have to wind-up, however IBEC noted the industry has already estimated three our of four DB schemes could fail to meet the funding standard compared to just one in four at the end of 2006.
O'Sullivan said: "The problems facing employers are being exacerbated by poor investment returns, declining asset values and longer life expectancy. Employer contributions have had to rise significantly in recent years simply to meet the draconian discontinuance funding standard. DB pension costs are increasingly regarded as a ‘bottomless pit’.
"The funding standard and other regulatory requirements are leading to the demise of DB pensions. Employers have a responsibility to act: if they increase payments beyond what can be afforded, this threatens the viability of employment and of the business," he added.
IBEC's comments follow reports in the Irish media revealing a leaked memo prepared by the department of social and family affairs has estimated the total pension deficit had increased to between €20-30bn as a result of the financial crisis, with 90% of DB schemes expected to be in deficit when they report solvency levels to the Pensions Board.
In response to the reports, Mary Hanafin, minister for social and family affairs, said: "These are turbulent and difficult times for money markets where most pension funds are invested. Pension fund managers have yet to report on their funding standards to the Irish Pension Board, but in public comments they have indicated that funds are subject to market fluctuations."
She stated the government is continuing to "closely monitor the situation" and is preparing proposals on the long-term strategy on pensions following the submissions made to the Green Paper on Pensions earlier this year.
There is also a political storm brewing over pensions in Ireland. According to the Irish Times, the Labour Party and the trade union Impact have strongly criticized radical proposals put forward by the employers’ body Ibec for public sector pension reform, including the ending of the existing defined benefit pension arrangements for all new staff:
The downgrade of Greece’s sovereign credit ratings from A, which is five notches below the top triple A rating, to A minus comes only five days after the country was put on credit watch by S&P.
It turns the spotlight on Portugal and Spain, which were put on credit watch by the agency this week, and Ireland, which was put on a negative outlook last Friday. These countries could face imminent downgrades.
And what about U.S. pension funds? Are they going to shore up U.S. banks as well? As I watch the shares of Citigroup (C) and Bank of America (BAC) crumble, I wonder how much more money is needed to kick start the banking sector.
Ibec said the Government should introduce a “fundamental repositioning” of public service pension arrangements. It said this should involve a move away from a defined benefit scheme – under which the size of the payout is guaranteed – towards a defined contribution scheme for new entrants, under which the employee would bear the risk of any shortfall.
Ibec said that in such cases the State should guarantee certain minimum investment returns.
The employers’ group also proposed the Government should end the current pay parity link under which public servants receive pensions based on the current salary attached to the post they held while working.
It also urged the Government to set a contribution rate cap beyond which employees would have to fund any pension liabilities on an equal basis.
It also proposed that all public servants should be required to contribute towards the cost of funding retirement benefits and that the Government should complete and publish a detailed actuarial analysis of the pension liabilities for public sector employees.
Ibec director Brendan McGinty said the country was facing the most difficult economic circumstances since the foundation of the State and it was time for strong leadership and for taking difficult decisions.
“Business will support Government in its endeavours on the basis that a reduction in the cost of the public sector is a priority. The average public sector pension is worth a premium of 13.5 per cent of salary more than the average private sector pension. Necessary reform must involve capping public sector pension liabilities and introducing fundamental reforms of public sector pensions”.
“A target of €5 billion reduction in total Government expenditure by 2012 is needed. In that context, public service pay and pensions cannot be exempt when one considers that the public sector pay and pensions bill will account for 51 per cent of all tax revenue in 2009. This is now urgent, with a shortfall in tax revenue of €8 billion for 2008 and an exchequer deficit spiralling to €20 billion.”
However, Impact, the country’s largest public sector union, accused Ibec of exploiting the recession to drive down the value of public and private pensions.
The union said Ibec’s proposals to “devalue public service pensions would do little to help the present crisis in public finances, but would effectively signal the end of employers’ responsibility for pension provision”.
Impact deputy general secretary Shay Cody said: “Ibec’s proposals would be a green light to employers – public and private sector – to dismantle occupational pensions. It’s a classic case of an organisation exploiting the recession in its members’ self-interest.”
He also said Ibec habitually exaggerated the value of pensions to most public servants.
Meanwhile, secondary teachers have threatened strike action if the Government moves to cut their pay or pensions. A meeting of the ASTI executive agreed to consider the move in the event of cuts in teachers’ pay or an attack on teachers’ pensions.
ASTI general secretary John White said teachers and other public sector workers have become scapegoats for the drastic downturn in the economy.
“The Irish second-level education service is not bloated. Any Ibec representative or right-wing economist who believes it is should spend some weeks in a second-level school,’’ he said.
The Irish National Teachers’ Organisation and TUI also condemned the proposals.
Labour Party leader Eamon Gilmore accused Ibec of pursuing “an old and bitter agenda”.
[Note to stakeholders: Ask your pension fund managers what is their total exposure to Citigroup and Bank of America, including internal and external portfolio managers.]
I also wonder about insurance companies that heavily invested in alternative investments and have their own toxic debt books to deal with. Who is the next AIG going to be?
As for pension funds bailing out banks, if it happens, it's another way to use the money of hard working people to bail out incompetence.
Then again, pension funds and banks were in bed together for years, fueling this financial crisis and they have some important characteristics in common - namely, they are non-transparent and there is no accountability.
So I say why not let pension funds bail out incompetent banks? Any way you slice it, taxpayers around the world are about to get crushed.