Pensions fund crisis

JTrader

Guest
5,741 506
Hello
I am hoping that a more knowledgeable person than my self will be able to answer my queries. :)

I have heard about the damage done to pensions funds caused by falling stock markets. However, why when the stock market started to fall did the people in charge of the funds not simply close open positions?

Are pension funds controlled by a Pensions Fund Manager(?) on an intraday basis?

How does they work?

Many thanks

jtrader.
 

juanbyte

Well-known member
332 10
Hi JT

The simple answer is they are [email protected]

My pension comany reduced my pension fund bu 15% last year reducing bonuses back 10 years.

Over the last 19 months the Dow has risen about 37%, do you think I will get the bonuses back, I doubt it. May write to them and ask.

Not all the fund is invested in shares, they also invest in property (does anyone know if property prices have risen in the past few years) bonds etc.

Futures are an instrument of insurance (hedge a share holding) so the fact that the market has declined should not be a factor.

You must consider their prime concerns of handing out 5/6 figure bonuses to their managers and of course the CEO needs his millions p.a.

The best person to invest your money is yourself and not some suit in the city.

Hope this helps
 

oatman

Senior member
2,879 22
The truth is that they don't trade, just "invest" :LOL: They haven't got a clue. Don't you remember how they kept telling everyone not to panic as the market dropped? I doubt if they knew what a futures contract was. Big fat bonuses is spot on.
Also the govt. tell you that you should save for your retirement. So Gordon Brown taxed pension fund dividends.
At least you know where you stand now.
It's too late for my pension, you must look after yourself.
 
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RogerM

Established member
752 6
jtrader - I have some sympathy with the views expressed by Oatman and juanbyte, but they are, perhaps, an over-simplification.

The latest figs I could find for 2000 show that 39% of UK shares were held by UK pension and insurance companies. A further 32% were held overseas - primarily with overseas insurance and pension funds. Add in the holdings in unit trusts and investment trusts which amount to a further 10% and you have 81% of the UK market held in institutional hands, compared to only 16% held by individuals. The balance of 3% was held by charities etc. Therein lies the reason why pension funds and insurance funds cannot beat the market - they ARE the market. No stockbroker or fund manager will ever go on TV and tell you to sell all your shares - they have a vested interest in supporting the market because they are are trapped in themselves. Perhaps they even want to create demand so that they have someone to whom they can sell their own shares?

It's a bit like the old saying that if you owe the bank £100 you have a problem. But if you owe the bank £1 billion, then the bank has a problem. The institutions were powerless to offload shares in sufficiently large quantities to make a difference to their holdings without bringing about the very collapse they were seeking to avoid. Who would be a buyer of stocks in those quantities in a falling market? They can hedge them to a certain extent with derivatives, but not enough to make a huge difference. So the average fund can, at best, match the market, but in reality, by the time you take out the commissions and management fees mentioned above, then perhaps it's not surprising that only 1 fund in 7 beats the all-share index.

Then you must understand what motivates a fund manager. He has a benchmark index as his target for perforamance. If the benchmark index rises by 5% two years in succession, he would rather his fund puts on 5% each year than rise 20% in year 1 and 0% in year 2. In year 2 he will be seen to have underperformed the bechmark by 5% and he will lose his job, and keeping his job is his main priority, not maximising your fund.

Governments of both persuasions must also take some responsibility. Nigel Lawson placed a low limit on how much surplus a pension fund could build up, which led to the prolonged contribution holidays taken by many companies. Further surpluses were squandered by being used to to boost the pensions of those being made redundant - in other words pension funds were used to fund unemployment. This is still going on. I know of at least 1 middle manager with Standard Life who is being made redundant at 50 and having his final salary pension boosted to the level that it would have reached had he worked until age 60, and he will be allowed to draw it in full immediately without any reduction due to early retirement. How many of you would retire from your current job at 50 on 2/3rds salary, free to take up another position elsewhere? So now you know where your bonuses are going!

And then Gordon Brown introduced the tax on dividends for pension funds, amounting to £5 billion per annum, on the basis that most pension funds were in surplus and could afford it. Strange that now that most funds have a huge deficit, and demonstrably cannot afford it, that he's still plundering them at the same level! Never mind. He voted for his own pension to be increased from an already generous 1/50ths scheme to an impossibly generous 1/40ths scheme ( a 20% increase) immediately Labour came to power. So Gordon will be OK - so stop worrying.
 
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oatman

Senior member
2,879 22
Well put Roger, but then you have to ask why there is so much emphasis on short term movement and managers' short term results.
They're quite happy to blow their own trumpets when results look good.......
 
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juanbyte

Well-known member
332 10
Excellent reply Roger.

The points you raised don't seem to come up when they are selling a pension plan.

I can only see things getting worse. As you say they cannot make decent gains due to the quantities invested, so the more we save and the more poeple join the less the returns will be.

Maybe they should go back to gaining control of companies and stripping the assets.

I took up trading due to the poor performance of my pension company.

Good thread and hopefully people are learning the truth.
 

JTrader

Guest
5,741 506
Thanks for the replies, my knowledge of pension funds has rapidly increased. Excellent reply RogerM (I think?).
Just one question. If institutions are the market, (39% UK, 32% overseas) then why did the markets fall? I thought that markets could only fall when there was more selling pressure than buying pressure?

Cheers.
 

jmreeve

Well-known member
432 13
When pension funds HAVE to liquidate positions it is usually at great cost to the fund.

There was the situation in Jan 2003 when funds had to sell stock to meet their legal requirements if the market fell below a level. Once the level was breached the FTSE fell 11 days in a row until they got a reprieve in the rules. This also turned out to be almost the bottom of the market so as usual all the pension fund holders got stuffed.

I am sure there were some hedge funds on the other side of the trade that did very well out of it though.
 

bracke

Experienced member
1,286 12
To those reading this thread and confused about where to put money for a pension consider a sip (self invested pension) You control it and are not at the whim of pension managers.

Regards

bracke
 

a0-0b

Member
78 0
RogerM said:
39% of UK shares were held by UK pension and insurance companies. A further 32% were held overseas
That would make it kinda hard for them to go short then :LOL:
 

sak07

Member
71 0
Having spent time at a leading investment/pension services provider as an intern I have no doubt that anyone with any knowledge of money management should go in alone i.e. SIP. I spent alot of time with the fund managers and found them to be the most arrogant bunch of individuals on the planet and wouldn't ever invest a penny into their hands. I agree with what's been said already, fund managers are essentially the market, and the sheer bulk size of their holdings mean that going to cash isn't a practical plan. But from what I witnessed I can say that many fund managers are very stuck in their ways and move slowly to react to markets when they change. Alot of them seem to suffer from a very basic flaw in that they will not right off a small loss when it looks like there judgement was wrong, looking at some of their funds holdings I noticed that most of their investments yielded a profit but there were a few huge losses that any trader, no matter how inexperienced would have cut earlier! Many of them have their favourite stocks ("old faithful" I heard one call it) and seem to become emotionally involved in the positions they take.

I went into this company expecting to meet some of the sharpest minds in the market, instead I found a bunch of over paid, cocky and surprisingly narrow minded individuals.
 

BBB

Experienced member
1,071 3
There is another point - there is so much risk aversion and investment 'bureaucracy' imposed by the FSA SEC and other bodies, that fund managers often find their hands tied in their investment creativity. An example being how they must diversify their portfolios across asset classes (bonds, cash, stocks etc). I'm not trying to defend fund managers - far from it - I agree with all the points and observations made above.
 

cas01

Junior member
28 0
Whilst I would agree that there a lot of poor fund managers about, I feel that they are not entirely to blame for the poor performance of pension funds. A lot of the blame should be levelled at the door of actuaries.

After all, for a corporate pension fund, the consulting actuary will make all the estimates of the fund's liabilites, assets and cash flows (contributions and money paid out to pensioners). Basically they decide what the historic rates of return have been for all asset classes (equities, bonds, property, etc). They then look at what assets the fund has (and what contributions are going to be made into the fund) and work out by how much they are going to have to grow in order to meet the fund's future liabilities. Given the expected rate of returns for all the asset classes, they determine a mix of assets that the fund should hold in order for it to grow by this required rate. This asset allocation might not be as glamorous as doing all the buying and selling of shares, but in the long run is going to have the biggest impact on the pension fund's performance.

In the 1980.s & 1990.s the actuaries understimated the rates of return that could be achieved by owning shares. So pension funds grew faster than expected, building surpluses in excess of their liabilities, which in turn allowed companies to slow down/stop making contributions to the funds (hence boosting the companies' profits, which again helped to boost equity prices). Having messed up, the actuaries then decided that these higher rates of return were going to last for ever and pension funds should be massively invested in equities. Along came the bursting of the bubble, with lower returns for equities.....and you guessed it, now the growth of pension fund assets could not meet their future liabilities.....hence the pension fund crisis.

Sorry for the rant but I just wanted to set the record straight.
 

timcatapult

Junior member
16 0
Fund Managers/Professionally managed Pensions funds are part of the myths that have grown up in the UK. However as 'Joe Public's' knowledge grows because of the internet and sites such as Trade2win I am looking forward to the day when Institutional funds no longer dominate the market.

Widening this thread but still in the area of professional so called services, My wife and I recently decided to re draw our wills (mirror wills with Trusts incorporated) Received 2 quotes for the work. First at minimum 4 hours at £200 per hour + VAT, Second at between £1750/2250 + VAT.

A few hours research on the web, wills prepared total cost £69.99 all in, which included written guidance which would have been an extra from a solicitor. :)

If you are not in an occupational pension - the route must be a SIPP and build your trading knowledge and skills via site such as Trade2win.
 
 
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