RPT-COLUMN-Pension savers get the boot: James Saft

(James Saft is a Reuters columnist. The opinions expressed
are his own)

By Jim Saft

HUNTSVILLE, Ala, November 30 (BestGrowthStock) – From Dublin to
Paris to Budapest to inside those brown UPS trucks delivering
holiday packages, it has been a tough few weeks for savers and

Moves by the Irish, French and Hungarian governments, and
by the famous delivery company, showed that in the post-crisis
world retirees, present and future, will be paying much of the
price and taking on more of the risk.

This goes beyond merely cutting back on pension benefits,
rising to actual appropriation of supposedly long-term
retirement assets to help fund short term emergencies.

Let’s start with Ireland, which is kicking in 10 billion
euros from its National Pensions Reserve Fund into an 85
billion euro package of support for its banks.

Trust me, this does not reduce the risk profile of the
NPRF, which was set up as a sovereign wealth fund to help pay
for state retirement benefits.

Putting aside jokes about sovereignty and wealth, of which
there is appreciably less in Ireland than formerly, this is
effectively a transfer of wealth from the Irish people to its
banks. Or rather, to the institutions, mostly European banks,
which hold Irish bank debt, none of whom as senior creditors
will share in the pain.

In many jurisdictions if Ireland were a corporation and the
NPRF part of the corporation’s pension fund, then making such a
move would be illegal, and quite rightly so.

Of course this is not the first time that the NPRF has been
used in this way. It has already “invested” 7 billion euros
into Irish banks and has pledged another 3.7 billion to
struggling Allied Irish Banks.

Also under consideration is a regulatory move that would
effectively compel some private Irish pension funds to hold
more Irish government debt, thereby providing the state with a
captive investor base but hugely raising the risks for savers.

On to Hungary, which is seeking to cut its very high level
of public debt as it prepares for entry to a euro single
currency which may well self-destruct before it ever gets the
chance to join. Hungary’s government last week finalized new
rules designed to force members of private pension plans to opt
back into a state controlled pay-as-you go option.

The idea, such as it is, is that participants in the
private plans will fork over their $14 billion or so in
savings, equal to about 10 percent of Hungary’s GDP, to the
government in exchange for a pledge of a pension from the
state. Hungary plans to use the funds to make pension payments
to current retirees this year and next as well as to pay down
government debt.

It is, in short, an outrage.


Earlier this month France launched a move similar to
Ireland’s as part of legislation that raised the age of

France is transferring more than 20 billion euros of assets
belonging to its Fonds de Reserve pour les Retraites (FRR), a
funded portion of its retirement system, to Cades, a fund
designed to be run down to pay for social benefits.

The transfer will take place over a number of years and the
mix of assets held by the FRR in the meantime will shift
radically, implying a large shift to government debt. Very
convenient for the French Treasury but perhaps not so good for
future retirees.

Finally, let’s turn to UPS, which earlier this month became
one of the most notable of a string of U.S. companies to sell
bonds in order to fund its obligations to its underfunded
pension fund. UPS sold $2 billion of bonds due in 2021 and
2040, with the longer dated portion yielding about 5.0

A decade of paltry equity market returns and current low
bond yields, which are used to calculate future liabilities to
retirees, have left many firms, including UPS, with funding

Debt financing pension obligations is in essence a plan to
try and make a spread between the cost of financing and the
returns the company is able to make on its pension assets.

Borrowing to speculate in financial markets to make up for
a lack of previous saving; what could possibly go wrong?

To be fair, UPS, which is one of many large U.S.
corporations making similar moves, can’t be equated with
Ireland or Hungary. UPS has the same legal obligation to its
pension fund no matter how it chooses to fund it, so the bond
issue from that perspective does not raise the risk for

That said, a participant in a company pension plan is
dependent on the ability of the company to meet its
obligations. The more debt the company takes on, the higher
that risk is.

Savers of all types are being asked to shoulder risks they
did not sign on for, the costs of which they will inevitably

(At the time of publication James Saft did not own any
direct investments in securities mentioned in this article. He
may be an owner indirectly as an investor in a fund. For
previous columns by James Saft, click on [SAFT/])

RPT-COLUMN-Pension savers get the boot: James Saft