STUMP » Articles » Around the World in Pensions: South Korean Scandal, German Pandering, and More » 28 November 2016, 06:24

You know, it’s not just the U.S. that has pension issues of various sorts.

Let’s do a whirlwind review!

SOUTH KOREAN PENSIONS CAUGHT UP IN SCANDAL

Mind you, this scandal is far bigger than the equivalent of South Korean Social Security. This looks like a good primer in the scandal.

Let’s check out the part that impinges on pensions:

Samsung Group, pension fund offices raided in growing South Korea scandal:

South Korean prosecutors raided the offices of Samsung Group on Wednesday, a prosecution official said, after media reports of alleged links with a confidante of President Park Geun-hye who has been indicted in an influence-peddling scandal.

Prosecutors also raided South Korea’s largest pension fund, the National Pension Service (NPS), an NPS spokeswoman said. The Yonhap news agency reported that investigators were probing NPS’s decision to approve the $8 billion merger of Samsung C&T Corp and Cheil Industries last year.

The raids signaled that prosecutors are expanding their investigation into allegations of influence-peddling in the corruption scandal that has rocked Park’s presidency over the relationship between the government and big businesses.

NPS, the world’s third-largest pension fund, has come under scrutiny by the media and civic groups over its approval as a major shareholder of the merger between two affiliates of Samsung Group, South Korea’s largest family-run conglomerate.

Its backing was seen as crucial to the success of the merger and some South Korean media reports said its approval came under mysterious circumstances.

More at the link.

By the way, this sort of thing is one of the many reasons I changed my mind about Social Security privatization. If you think the Calpers pay-for-play scandal was bad enough, which is only public pensions for a certain set of California employees, imagine if it covered the entire U.S.

There are benefits to pay-as-you-go, and one is the lack of such scandals.

GERMAN POLITICIANS PANDER TO THE NEARLY RETIRED

In Spite of Thrifty Image, Germany Races to Raise Pensions

BERLIN—There is a ticking demographic time bomb in fast-aging Germany that threatens the country’s generous welfare system.

Politicians’ reaction: Spend more money on pensioners.

At a meeting on Thursday night, Chancellor Angela Merkel’s government agreed to spend nearly €4 billion ($4.2 billion) more on pensions annually in a bid to bolster the incomes of people in eastern Germany and those unable to work.

And this is just the beginning. With next year’s general election approaching, parties are jostling to grab votes from the bulging cohort of current and soon-to-be pensioners with promises economists warn could put a huge burden on Europe’s largest economy.

These range from guaranteeing a minimum pension for some workers to raising pensions for everyone and injecting more taxpayer money into the system, all of which would add tens of billions of euros to its vast financing needs.

……
Of the country’s roughly 82 million inhabitants, more than 20 million are already retired. Last year, Germans older than 60 made up 34.8% of the population compared with 27.8% in 1995. The share of those above 50 stood at 54.4%, up from 44.9% in 1995.

The over-50 aren’t just the biggest voting group, they’re also highly mobilized, pollsters say. A September Forsa poll showed 75% of Germans were deeply concerned about old-age poverty.

Much of this concern focuses on a provision that entitles all workers to a state pension worth at least 43% of their average income over their working years. The law expires in 2030, however, and economists warn that extending it without raising the retirement age would put too heavy a burden on the shrinking number of workers who maintain the program.

Note the 43% replacement rate target.

This is what U.S. Social Security gets you: about 40% if you have average earnings and retire at your NRA (normal retirement age), which is 66 for most Boomers and 67 for my generation and later. The replacement ratio is higher for very low earners (up to about 80%) and lower for very high earners (down to 20%-ish). This is comparing against indexed wages over the working years.

So not all that different.

Here’s some lovely graphs from the article:

Note how different the U.S. is, especially with regards to older folks working.

As for the German pandering, we see the weakness of straight democracy: the majority wins, and the minority (in this case, young folks) might get their interests trampled all over. But the more rapacious that majority hunger is to be fed, the less the minority can feed it.

So as these countries get older, there is more and more of a drive to shovel money from the young folks to the old folks… but the demographic pyramid is becoming upside down. Where is that money going to come from?

That’s why I keep predicting no pension bailouts here in the U.S.: the old folks may be a powerful voting bloc, but they can’t vote young folks with money into existence. They may be able to tinker on the edges in the short-run, but it won’t pan out longer-run. They can plug a few holes temporarily, but the maw of underfunded pensions will gape open again.

Our demographics are not as bad as Germany’s, but the fertility rate is still such that the pig-in-a-python that is the Boomers (oldest just turned 70 this year, and the peak numbers are at about age 59 right now) can’t easily be supported by the 2.1 kids they had.

POLISH RETIREMENT AGES TO DROP

Polish Lawmakers Approve Budget-Bulging Retirement Age Reduction:

Law to push retirement age back to 65 for men, 60 for women
Cost seen at 10 billion zloty in 2018, near 20 billion in 2021

Poland’s parliament voted to overturn a four-year-old increase in the country’s retirement age, putting pressure on an aging labor market and adding strain to public finances.

Making good on a pledge that was central to its victory in general elections a year ago, the ruling Law & Justice party approved a bill Wednesday to roll back an increase in the retirement age that was approved by the previous administration in 2012. The legislation, which requires approval by the Senate and President Andrzej Duda, both allied with the government, will reverse the rise in retirement age to 67 from 65 for men and 60 for women as of October next year.

While aging populations and longer lifespans have forced forced most EU countries to raise retirement ages despite public outcry, Poland’s government is pushing measures including increases in minimum wage and pensions, benefits for families with more than one child and free medicine for the elderly. With unemployment at 8.3 percent, the lowest in a quarter of a century, and millions working in richer European Union states, some employers in the country of 38 million people worry about the availability of workers in the future.

This is just plain foolish.

First off, women live longer than women everywhere in the developed world. By several years, on average. Women should not be encouraged to stop working 5 years earlier than men.

Also, there is some weird things going on in the Bloomberg text. “forced forced”? A grammar checker should be able to catch such an error (mine is, which is why it popped out at me.)

A lot of people can work far beyond age 60, if they’re not working in hard manual labor. I know I’m very lucky in working jobs I actually enjoy, and I know most people would rather stop working ASAP. But as some simple advice, just thinking about longevity risk — and even if you have a “rock solid” pension, there may be issues — I recommend working as long as you’re able.

Many people find they’re unofficially retired before they planned due to a layoff or illness/disability. I know it’s tough to find another job after such a problem at an advanced age. But really, if you can keep on keepin’ on, I recommend it.

FRENCH PENSIONS SQUEEZED BY BONDS

Bond Squeeze ‘Bleeding to Death’ $28 Billion Pension Fund

France’s second-largest pension fund is at risk of “bleeding to death” if government bond yields remain low and it’s unable to increase investments in riskier assets, according to the company that manages the fund.

“Our allocation to bonds is absolutely sub-optimal,” Philippe Desfosses, chief executive officer of ERAFP, said in an interview at a conference on Monday. His firm oversees the 26 billion-euro ($28 billion) RAFP fund for public servants. Desfosses wants France’s government to cut the minimum allocation to bonds in the trust’s investment mandate.

The pension trust’s annual return, which was 4 percent last year, could fall to as little as 0.4 percent within the next few years if the low-interest rate environment continues and the allocation restrictions remain unchanged, Desfosses said.

While yields on government bonds spiked after Donald Trump’s election as U.S. President, interest payments on 10-year French and German government bonds remain below 0.9 percent, the return ERAFP aims to achieve for retirees. The pension pot faces a dilemma prevalent across Europe: a dearth of safe, long-dated investment options that match liabilities, as purchasing by the European Central Bank has pushed yields on sovereign debt to historic lows.

“One of the major issues for our European economies is this pension time-bomb,” said John Hourican, CEO of Bank of Cyprus Pcl, said in London on Wednesday. “There isn’t enough risk being taken by the asset-management industry” and a change of rules is needed, he said.

50% Bonds

Desfosses’s fund has to invest at least 50 percent of its assets in bonds, a threshold he would like to see halved. The manager wants the fund’s maximum investment in stocks to be increased to 50 percent from 40 percent, and in real estate to 15 percent from 10 percent.

The fund manager has met regularly with officials from France’s economy ministry to argue for a change in the pension pot’s asset allocation restrictions, but with little success.

So they don’t quite mention it in the piece, but of those 50% bonds in the portfolio… how many are French government bonds?

Talk about doubling down on risk.

Public pensions have many dangers in their asset portfolios, one of which is that they are generally overseen by political actors, and they have an interest in shoving as much of their own interests in the investments. The main danger in the U.S. right now seems to be divestment from dirty stuff and investment in “clean” stuff, which led to Calpers losing $1 billion not that long ago.

But a much more direct-dealing by politicians would be issuing bonds that the pensions have to buy.

The pensions that are dependent on the government issuing said bonds, in case the assets don’t perform.

Yeah, not a great idea from a risk management point of view.