Alternative Viewpoints: Pension buyouts can make the bailout plan look small
Oct 5th, 2008 | Filed under: CAIA Alternative Viewpoints Columns, Guest Posts, Today's PostOver the past 2 years, a revolution has been quietly brewing. Rather than using portable alpha or liability-driven investing some pension plans are throwing in the towel entirely and off-loading their funds to third parties. One such third party is the innocuously-named Pension Corporation, a London-based company whose business includes buying up pension liabilities. Today as part of our series featuring members of the CAIA Association, Dr. Bob Swarup, CAIA, a Partner with that firm explains what led to the birth of this potentially massive new industry. Bob holds two Master’s degrees and a Ph.D., is active in the CAIA Association and has written various articles for FT Publications, the Daily Telegraph and New Scientist.
Alternative Viewpoints – “Pension Buyouts”
Special to AllAboutAlpha.com by: Dr. Bob Swarup, CAIA, Partner, Pension Corporation
To much of the investment community, most pension funds are boring entities eternally bound to old family recipes of formulaic asset allocations – Balanced, Conservative and Growth – all left to ferment for the next half century or so. The logic is impeccable – they have the luxury of a long-term perspective, many adherents will argue, that allows them to ignore the short-term volatility of the financial markets and focus on harvesting the inevitable risk premia of these asset classes over time to meet the liabilities of their pensioners as they fall due.
Ironically, this same attitude is also responsible for making pension funds the perennial cold call for every manager looking to add some ‘sticky’ money to their assets. They are comfortable with modest (others may term “disappointing”) returns, they are slow to redeem (unlike the rest of those pesky investors) and they are remarkably understanding of failure, just like your mother was after you drove over the family cat.
But there is a small problem in the background of the picture. Most pension schemes are chronically in deficit and the problem is only set to worsen in the current economic climate. Everyone has talked ad infinitum about the $700bn bailout package in front of Congress to stem the hemorrhaging from the credit crunch. I doubt if many realise that a similar amount is also needed, for example, in the UK to fill the deficit in just that country’s private sector pension schemes. Throw in the public sector and you’re talking up to another $2 trillion.
Old Problems More…
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If we concentrate pensions in a few companies, don’t we run the risk that if those handful of companies failed, our pensions would as well? As we have seen, aggressive financial engineering and “portfolios run on an absolute return basis”, “and the demand for superior risk-adjusted returns from managers”, has caused the world to fall into the worst financial crisis in since the thirties.
Good luck to those whose pension is “bought out”. Tthe government will probably bail you out in 5 years…hopefully there is enough money left over.