Barnier: Let Your Grandmothers Eat Cake!

EU Commisioner Michael Barnier issued a statement yesterday that put off addressing solvency problems in occupational pension funds. At a time when the Economist accuses European leadership of ‘sleepwalking’, this is a classic example of turning the pillow over and returning to dreamland.

It would seem obvious that pension funds need to remain solvent. They are not going to get out of the vastly underfunded hole they are in by investing in risky ventures and leveraging themselves up. But that is exactly what giving them a pass on capital requirements is inviting them to do. People do what you incentivize them to do, and making a distinction for pension funds creates an incentive to push risk to them.

Yes, there is a hard conversation waiting to be held, about switching from defined benefit to defined contribution. As hard as that conversation will be, it is far easier than one about fund failure.

The main reason I have pursued working on XBRL since 1999 is to improve investment decision-making, mainly the avoidance of fraud and the knowledgeable acceptance of risk. We saw the retirement funds of Enron vaporized by the criminal acts of a few at the top, affecting thousands of workers.

Old ladies should buy cat food for their cats, not themselves. Fund beneficiaries are extremely vulnerable, and not in a position to compensate for the failure of their pension by re-entering the workforce. If we accept this truth, it should be obvious that pensions should accept less risk, not more.

Here’s another way to look at it. The advice of retirement planners is to shift your asset mix to less risky investments as you near retirement. If we sum across all pension participants, that means that funds should hold less risky investments as their participant group ages up, which is certainly happening in European occupational pensions.

Pensions + risk = old ladies eating cat food. It is that simple. Michael Barnier, leadership is necessary.

 

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