The Ponzification of pension finance

Today’s Tory DailyGuff reports that the number of people paying into UK workplace pensions has fallen to its lowest level since 1953.

For some reason, the story makes the front page of the print edition but isn’t linked from any of the main sections of the web site. Nor does it show up if one searches the site for ‘pensions’. You have to search for James Hall, the writer, and look for the piece in his story list.

Anyway, it quotes Joanne Segars, the chief executive of the National Association of Pension Funds, who says:

“… squeezed household budgets and the weak economy mean that many people see a pension as a luxury rather than a necessity”.

Yes, having enough money to live on after you stop working is now a luxury. Better die before you get old.

Lost faith and trust

Ros Altman, director-general of the Saga over-50s group, puts it plainly:

…people are leaving pension schemes because they struggle to afford the monthly payment.

“People have lost faith and trust in pensions. It is clear that workers are valuing pensions less and less, and companies are offering them less and less.”

Paying into a pension calls for tons of faith and trust by the payer. The biggest leap of faith is to believe that the fund managers will be able to earn 8% or more on their investments. Because the fund won’t pay out anything like what was promised if they don’t.

Eight per cent? Year in and year out when central bank interest rates are negative and the US, EU, UK and Japan are printing money like mad? Ha bloody ha.

No safe investments

One of the primary drivers of the great financial meltdown was the banks’ need to dress up massively risky derivative bets and subprime loans as ‘safe’ enough for pension funds to buy. Sure they reeked of rotting offal but, as long as they were unaccountably rated Triple-A, the institutions happily loaded up with these investments. They were the only way of getting the notional returns they need.

Worse, the banks then sold them ‘super safe’ Credit Default Swaps that also promised high returns as long as the debts the funds were insuring through these CDS didn’t go bad.

But they did go very bad. Now the funds aren’t able to make returns, aren’t able to recruit workers and are still technically on the hook for billions of pounds if they have to honour the CDS.

None of this is news to readers of The Automatic EarthEconomic Undertow or Jim Kunstler’s blog but even the least-switched-on punter can’t help detecting the aura of unreality and desperation that surrounds the whole business.

Goodies to insiders

The pensions industry obviously realises that its only remaining function is to wind itself up while making sure the remaining goodies go to the insiders. I know one guy who was the financial director of a division of a big name company who retired early years ago because he could see the writing on the wall.

“I felt really guilty,” he told me. “But what could I do? The fund’s first duty is to pay its members who are already drawing their pensions. When it all goes wrong, those still working are the ones who end up losing most or all of the pay-out they anticipated. I got out while I was still ahead.”

Peak oil killed the growth fairy

As far as the Western economies are concerned the pensions bubble burst when peak oil killed the growth fairy a few years ago. Big fat pensions were possible for a few glorious decades while fossil energy was, to all intents and purposes, limitless and virtually free and while the old wealth-funnels coming in from the rest of the world were still in place.

Now there are billions more human beings chasing their slice of the shrinking pie. They prefer to keep their wealth for themselves, thank you very much. Meanwhile the returns on setting fire to 500-million-year-old plants and plankton are diminishing steadily as the remaining reserves become ever-more difficult and expensive to exploit.


All this makes the UK Government’s scheme to auto-enrol workers into workplace pensions look even more breathtakingly cynical. These schemes don’t have a hope of paying out much, if anything, to those required to pay into them.

Instead, they will be yet another manifestation of the Ponzification of finance: taking money from increasingly impoverished workers and shoveling it to the people now retiring at the end of the era of gold-plated pensions: ready to spend the next 30 years shopping in John Lewis, going on cruises and complaining about the price of petrol and the habits of younger people.

It’s highly unlikely that such an unequal arrangement will last long in a liberal democracy. But then who’s to say that liberal democracies themselves are not merely artefacts of the age of fossil-fuelled growth in the same way that fantastically generous final salary pensions once were?

Racing new car retailers towards the cliff edge

The global market for fleet vehicles  is “flourishing” says the Financial Times.

 Companies that deferred renewing their fleets during the credit crunch are now making up for lost time, and ordering record numbers of company cars, vans, and heavy trucks .

Looks of puzzlement and mutters of ‘I wish’ greeted this clip during an auto industry meeting attended by QuadRant yesterday.

To be fair to the FT, the clip was not news or comment but their ad department attempting to drum up support for a forthcoming fleet supplement.

Fleet sales down

In fact UK fleet registrations were down by 0.7% between January and August this year. Business sales (to small companies and sole traders) were much worse – plunging by 15%.

Only private sales look good. But much of the 10% rise reported by the SMMT is deceiving.

Nearly new cars languish on dealer forecourts,” reported Motor Trader last week.

 Despite the market being supported by the private sector Glass’s reports that franchised dealers do not recognise this strengthening in retail demand.

Adrian Rushmore, Managing Editor of Glass’s, said: “What is recognised is the growing number of nearly new cars that have started to languish on forecourts.” Between June and July the number of 1212 plated cars advertised increased by 50 per cent.

In other words, the market is loaded up with cars registered by the industry to itself, just to keep its numbers up.

Manufacturing used cars

It’s true that ‘manufacturing’ nearly-new cars actually accounts for a big chunk of the auto trade. Employees of the car makers and retail outlets are given brand new cars every six to nine months.

Then the cars go to the forecourts with a few thousand miles on the clock as ‘ex demonstrators’ or suchlike, at a substantial discount. Hundreds of thousands of ‘nearly news’ are made this way every year.

‘Fleet’ sales also include new cars registered to finance firms but driven by punters on personal leasing deals, and cars bought by daily rental companies.

That helps explain how the industry chalks up a million such registrations every year when genuine company car drivers currently need fewer than 300,000.

Stuffing the market with unwanted cars

But even this convoluted system isn’t always enough. Sometimes some manufacturers simply stuff the market with thousands of new registrations that nobody has any use for.

That’s what the Motor Trader article is highlighting. There are 50% more brand-new, plated cars with delivery mileage on the clock on forecourts. That will bugger up prices and margins throughout the house of cards that is the ‘new’ car market.

Sure, this sort of thing happens fairly regularly. But this time around there’s less chance of the market bouncing back to absorb the excess. The auto makers’ cushion is wearing thin.

The industry has a massive problem with fuel costs. I don’t mean high pump prices (although they are affecting demand). I mean the fact that the oil price needed to bring fresh supplies of liquid fuels to the global market is simply too high for Western economies to bear.

High-priced black stuff

Western economies, designed for $25 oil, don’t grow when the black stuff costs $100. But if crude sells for less than $100, there’s no justification for producers to invest in expanding expensive tar sands, shale, deep sea and polar sources.

So OECD growth stalls, household incomes stagnate and personal debt becomes disabling rather than enabling. People are forced to conserve. But conservation supports the high oil price at the root of the problem by killing the incentive to exploit the remaining, hard-to-get-at, resources.

Simply cutting retail fuel prices won’t help much. A few people will use their cars a bit more, or change them. But many would use cash saved at the pumps to pay down the loans, credit cards and mortgage debt that are crippling household finances.

Even so, the auto industry’s reaction is to repeat what it’s always done in the past. It’s stuffing unwanted units into a shrinking market. And hoping the surfeit won’t choke too many dealerships to death before growth returns ‘as it always does’.

Oil and energy prices say growth won’t return. So the car industry needs to find a smarter way to manage declining demand. Because doing what it has always done will turn a hazardous descent of a rocky slope into a full blown plunge over a cliff edge.