Pension funds will be prevented from investing in risky assets, including stocks, by the Pensions Regulator under plans to stop weaker companies with large pension shortfalls from making huge bets.Is Mr. Norgrove right to limit risky bets by small underfunded pension plans? I think so. Taking risky bets to make up for losses might sound perfectly fine, but it could easily backfire, especially if we head into a protracted period of debt deflation.
David Norgrove, chairman of the regulator, will outline his concerns that some schemes are taking risks that could leave a bigger hole in the industry funded Pension Protection Fund in a speech to funds on Tuesday.
A colleague of mine remarked that in the last ten years, JGBs outperformed the S&P 500. And yet 10-years ago everyone was screaming about how low Japanese bond yields were and many hedge funds were actively shorting JGBs. They all got slaughtered, and more will get slaughtered shorting Japanese bonds, even now.
But isn't the Fed giving money away to banks so they can trade risk assets all around the world? Shouldn't pension funds also be allowed to take huge bets? That all depends on the internal expertise of the pension fund managers, on their risk management process, and most importantly, on their governance.
I'm not saying to go all in government bonds just in case debt deflation hits, but it's simply foolhardy to think that investing more in alternatives will help shore up these pension funds. All this to say that sometimes it's worth bucking the trend and playing it safe. I know hedge funds, commodities, real estate and private equity sound sexy, but the truth is it's a lot sexier to limit your downside risk, especially if you're a small underfunded pension plan paying out benefits.