When reading the morning paper I'm often surprised by how strange some important things are set up in this world.
Take pensions for example. They're called retirement plans, pension schemes or superannuation plans, depending on the country. In Holland they're simply called pensions, and almost everyone has them. For most employees they are even mandatory. Whole industry sectors are collectively insured with some of the larger national pension funds. This makes these pension funds some of the largest investors around. For example the
ABP fund has 1.1 million active paying members, and a total asset value of 173 billion euro, making it the second-largest pension fund in the world.
The deal is simple - you and your employer pay about 8% of your salary to the fund, every month, every year. In return (assuming you've worked for 40 years) you'll get 70% of your last salary as a pension when you retire at 65. At least so we're told. And who reads the small print?
Now with the economic crisis people are suddenly finding out that the deal isn't so simple at all. This morning ABP
reported that not only will it freeze the yearly inflation correction of its pensions for the next 5 years, but it will also increase the premiums to be paid by employers and employees. There is also talk of downright lowering the value of future pension benefits. In any case this will hurt employees twice - they will have to pay more now, and get less pension at 65. It appears the pension funds simply put all their money into shares, without using any saveguards such as options to guard agains falling stock prices... And the small print allowed them to do this. In practice it absolves them of any accountability for bad investment performance.
So back to the initial question - how hard is it to run a pension fund? Not hard at all. When the economy runs well you show up at shareholder meetings looking all big and important. People will look at you with respect ("those are the guys that invest billions in this company"). But you don't ask any difficult questions about ROI or financial stability. Oh no, you just sit there looking important. And when the economy turns bad and you loose billions of the money your members put in, you simply ask them to give you more money. It's their risk anyway. You're not accountable after all. You didn't cause the crisis, right? (No, but you were paid hugely to see it coming and react). Because of the collective and mandatory nature of pension participation there is no motivation for the funds at all to improve financial performance.
Now I'm not personally affected as a business owner. I have my own personal pension fund that I have to manage myself. That probably doesn't look attractive to most people but my take-away advice to employees for today is:
- Demand from your employer that you get freedom to select a pension provider. This will at least theoretically give the fund managers some motivation to step up to the plate and do what they're paid for.
- Investigate all the freedom (and responsibility) that you gain by becoming a freelancer or small business owner yourself.