Monday, November 26, 2012

AP-fonderna – fixing them the wrong way

 Unga Aktiesparare, November 26th 2012, Alexandre Arnbäck

Like other pension systems around the world, the Swedish one has suffered from twelve years of difficult markets (IT bubble, 9/11, Financial crisis, EURO & Government debt). Many of us, have been told that “unprecedented events” are jeopardizing our pensions and we might have to contribute further, work longer or receive less. In the wake of the turmoil, our government (and many others) has asked for an audit. Sweden has received its audit and the feedback period is almost over. I am concerned and so should you be. Why? Well first of all, the vast majority of the audit committee is from the financial industry, people making money on taking commissions from our pension savings. Would you ask Philip Morris and Japan Tobacco to analyze and suggest improvements for the anti-smoking policy?

 What else? In its 622 pages, the big conclusion from the report is “unprecedented events” were unpredictable. Great! Is that not the definition of risk per say? Did we really need a group of experts and 622 pages for that? Because I can tell you we will have other unprecedented and unpredictable events in the future – that’s what the future is about.

So, 622 pages of financial mumbo-jumbo not accessible to most of us, and since the pension issue concerns all of us, let’s make it accessible. Let’s picture the financial markets as a lake, the boats are the different pension funds and the passengers are us, the workers, contributing on a monthly basis with a portion of our salary. Then, imagine a river (economic growth) pouring into the lake increasing its level.

30 years ago, pension funds, which used to invest in safe bonds, started to look at riskier assets such as equities, hoping for improved long term growth to further finance our pensions – a great idea. Then came 20 years of quite steady market increase, meaning the river was pouring enough water to increase the level of the lake. This had tremendous effects for three groups of people:

• First for us, the workers, as financial markets provided us with extra money for our pensions.
• Second for the political and administrative chiefs who tapped each other’s backs for having taken the wise decision to increase risk. • Last the financial system (banks and other money managers) because they could take more fees each year without anyone noticing since the level of the lake was increasing.

Financial companies and other banks made us believe they were the architects of that success. In our lake example, imagine captains (bankers) are able to convince passengers that the boat is floating higher not because of the tide but thanks to the fantastic technical ability of the boat they purchased wisely and piloted skillfully.

Weather is uncertain (read risk), as are financial markets. One day early 2000, the river slowed down and the level of the lake started decreasing. Unfortunately, that period lasted (and maybe still is). What happened? The passengers started worrying they might get stuck in the middle of the lake and never navigate home. The captains told them, “let’s buy better (and more expensive) boats”. No matter what they did, the level of the lake (and the boats) kept going down.

Now that the level has gone down for about twelve years, captains are feeling the heat from passenger complaints so our government asked for an audit. That audit is 622 pages long and almost no passenger can understand it. But it looks very professional, so most probably passengers will calm down and hope again the captain will be able to influence how high the boats can navigate.

Where is the catch?

Do you believe anyone could influence the weather? In financial markets it’s the same, and there is a reason for which most pension systems around the world are suffering, it’s because the tide is going down, and the captains can’t do anything about it.

What does the 622 page audit suggest? Well they more or less say that you have to switch to more modern boats. Will that increase the level of the lake? Certainly not! Will the lake tide go up? Maybe, but it will not depend on the boats or the captains.

What could the solution be? The audit suggests creating three (instead of seven) free standing pension units. Fair enough. One idea though: request that one of the three be a solid floating platform without a captain (read buy financial markets as a whole without the costs). In ten years, by comparing the three pension systems, we will know if it makes sense to continue to pay for expensive captains and ships rather than trusting the level of the lake.

It is our responsibility as workers to make sure our government and financial system treat our savings fairly. If we do not reclaim control over our drifting system, we and our children will pay the price.

Av: Alexandre Arnbäck, Financial coach and Co-Author of “Heal your investments, a story your banker will never tell you”.