When they started, pension funds invested in a basket of government (and select corporate) bonds with maturities that approximated their liabilities.
That worked ok for the pensioners, but not good for the fund managers:
- sometimes bonds with desired maturities were not available
- it wasn’t difficult, so they couldn’t justify much by way of fees. - essentially all fund managers offered the same, so hard to compete
- the fees that they did charge made their return worse than a simple basket of bonds
To address the first problem investment bankers persuaded the pension fund managers to buy derivatives which could emulate bonds with the desired maturities. They weren’t exact, but could be very close: and the risk was very very very small.
Which was ok, just. But then the pension funds noticed that derivatives could also solve their second and third problems: they could all do their own , slightly different, thing AND justify much bigger fees. So they ramped up their use of derivatives.
Then the investment bankers pointed out that they didn’t actually need to put up all the cash for the derivatives: just a bit, as margin with some real bonds as collateral. By leveraging their investments (bets) in derivatives, pension fund managers could at last show that they offered (on a non risk adjusted basis) returns higher than a simple basket of bonds. Then the use of derivatives really rocketed.
Pension funds really shouldn’t have (be allowed to have) any liabilities other than the actual pensions. If you want to let pensioners improve their returns then let the pensioners use the pension as collateral and make their own decisions on the leverage with which they are comfortable.
If you don’t think individual pensioners should be allowed to leverage (gamble) their pension because it received tax benefits in order for it to support the pensioner in retirement, why let pension funds do it on an industrial scale?
But the IMF thought it was the tax rates and didn't mention pension margin calls at all, and everyone here told us two days ago that IMF know everything, better than any one else.
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https://mobile.twitter.com/EdConwaySky/status/1575128310740389889
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Krugman knows that and is still quite chilled.
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Another of Risky's sock puppets!
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He's right, the policies are bad and stupid but the reaction has been wildly out of whack with how extreme they actually are.
The real sin is doing something so brazenly anti-consensus.
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Heh! No no, I think this whole situation is self-inflicted batshittery. Krugman is my copium.
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He is chilled because he doesn't give a shit about hundreds of thousands of destitute British old people. It's not a global issue.
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Stepping over 80 year olds begging at the tube station but it's fine because "this isn't a global crisis!!!"
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I just don’t think he’s approaching it from that angle Clergs, and also there is no link (yet) between what’s happening and elderly homelessness.
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I agree tbh. Krugman’s definition of “not a big deal” isn’t necessarily ours
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Krugman doesn't have a great track record iirc.
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When they started, pension funds invested in a basket of government (and select corporate) bonds with maturities that approximated their liabilities.
That worked ok for the pensioners, but not good for the fund managers:
- sometimes bonds with desired maturities were not available
- it wasn’t difficult, so they couldn’t justify much by way of fees. - essentially all fund managers offered the same, so hard to compete
- the fees that they did charge made their return worse than a simple basket of bonds
To address the first problem investment bankers persuaded the pension fund managers to buy derivatives which could emulate bonds with the desired maturities. They weren’t exact, but could be very close: and the risk was very very very small.
Which was ok, just. But then the pension funds noticed that derivatives could also solve their second and third problems: they could all do their own , slightly different, thing AND justify much bigger fees. So they ramped up their use of derivatives.
Then the investment bankers pointed out that they didn’t actually need to put up all the cash for the derivatives: just a bit, as margin with some real bonds as collateral. By leveraging their investments (bets) in derivatives, pension fund managers could at last show that they offered (on a non risk adjusted basis) returns higher than a simple basket of bonds. Then the use of derivatives really rocketed.
Pension funds really shouldn’t have (be allowed to have) any liabilities other than the actual pensions. If you want to let pensioners improve their returns then let the pensioners use the pension as collateral and make their own decisions on the leverage with which they are comfortable.
If you don’t think individual pensioners should be allowed to leverage (gamble) their pension because it received tax benefits in order for it to support the pensioner in retirement, why let pension funds do it on an industrial scale?
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Tl;dr?
Pension fund managers are leeches
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Is clergs coming out for the old people? Huge, if true.
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"Trussonomics is deeply stupid."
I knew I could count on Krugman.
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It’s not pension fund managers, it’s investment consultants.
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But the IMF thought it was the tax rates and didn't mention pension margin calls at all, and everyone here told us two days ago that IMF know everything, better than any one else.
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