Money matters
Jan. 14th, 2006 01:00 pm![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
peterbirksOK Harrison, I bet you haven't been playing this music choice in the past few weeks!
It always amuses me when people battle against the closure of final salary pension schemes. My employer is the result of millions of mergers/takeovers, and because of this there are myriad schemes within the company. However, since turnover outside editorial is quite high (let's face it, would you stay in sales or marketing for longer than two years?), there are only a few employees in my building on the final salary scheme offered by the now-no-more Lloyd's of London Press (yes, we publish Lloyd's List, the world's oldest daily newspaper).
As they fret that this scheme might be taken away from them, I say that I wouldn't enter a final salary scheme if it was thrown at me. Money purchase schemes, I tell them, are far preferable. Since these people tend to believe what they read in the newspapers (you would think that they would know better) they look at me as if I am mad.
Look, I say, if you are in a final salary scheme you are effectively lending money to your company at a very generous rate. And, if they spunk it all away so that there is none left, you are very near the bottom of the pile (just above shareholders) when it comes to getting any money back. And the government compensation scheme recently introduced merely exacerbates the moral hazard. I, meanwhile, get the money that is placed in my pension scheme parked somewhere else, every month, where the company can't get near it. Now, which would you prefer?
Hmm, they say, when you put it like that...
The only people who might logically argue in defence of final salary schemes are employees in the public sector. But I suspect that even here there may be trouble ahead. What happens if urban councils can't put up their local taxes enough to pay for existing pensions? Already we have local councils doing a fair impersonation of General Motors or Ford in that a large part of their budget is now allocated to people who aren't doing any work any more. It can't go on forever.
Centrally funded civil servants probably have the right to feel safest. Governments, after all, never default, do they?
Tell that to retired teachers and army staff in Russia. The ones selling any old trinkets on street corners, because their pensions are now, basically, worthless, thanks to the clowns running the country when Yeltsin was in power.
++++
And, speaking of sovereign debt, a subject dear to my heart (particularly the misleading phrase "emerging markets", when it isn't clear where they are emerging from or, indeed, where they are emerging to — but "sub-prime" markets doesn't have the same ring, does it?) I see from today's Lex Column in the FT that yields on Italian sovereign debt (Birks opinion, little better than shite, triple B minus) are a mere 20 basis points above that of Germany (Birks opinion, double A plus). The only logical exxplanation for this narrow spread is that investors continue to hold the naive belief that the EU will not allow a member's debt to default. That might have been the case when there were six, nine, or even 12 members, but I don't think it holds true now. There is a tangible, and not minute, chance that Italy will fall apart. There is a definite chance that it will default on its debt within the next 20 years — perhaps not up there with the chance of GM defaulting within the next five years (now happily sitting at above 50% probability), but a significant chance nevertheless. If I were in the markets, I'd be punting on widening spreads between triple A sovereign debt (T-Bonds) and, ahem, "emerging market" debt. Italy's yield will be somewhere between the two.
It always amuses me when people battle against the closure of final salary pension schemes. My employer is the result of millions of mergers/takeovers, and because of this there are myriad schemes within the company. However, since turnover outside editorial is quite high (let's face it, would you stay in sales or marketing for longer than two years?), there are only a few employees in my building on the final salary scheme offered by the now-no-more Lloyd's of London Press (yes, we publish Lloyd's List, the world's oldest daily newspaper).
As they fret that this scheme might be taken away from them, I say that I wouldn't enter a final salary scheme if it was thrown at me. Money purchase schemes, I tell them, are far preferable. Since these people tend to believe what they read in the newspapers (you would think that they would know better) they look at me as if I am mad.
Look, I say, if you are in a final salary scheme you are effectively lending money to your company at a very generous rate. And, if they spunk it all away so that there is none left, you are very near the bottom of the pile (just above shareholders) when it comes to getting any money back. And the government compensation scheme recently introduced merely exacerbates the moral hazard. I, meanwhile, get the money that is placed in my pension scheme parked somewhere else, every month, where the company can't get near it. Now, which would you prefer?
Hmm, they say, when you put it like that...
The only people who might logically argue in defence of final salary schemes are employees in the public sector. But I suspect that even here there may be trouble ahead. What happens if urban councils can't put up their local taxes enough to pay for existing pensions? Already we have local councils doing a fair impersonation of General Motors or Ford in that a large part of their budget is now allocated to people who aren't doing any work any more. It can't go on forever.
Centrally funded civil servants probably have the right to feel safest. Governments, after all, never default, do they?
Tell that to retired teachers and army staff in Russia. The ones selling any old trinkets on street corners, because their pensions are now, basically, worthless, thanks to the clowns running the country when Yeltsin was in power.
++++
And, speaking of sovereign debt, a subject dear to my heart (particularly the misleading phrase "emerging markets", when it isn't clear where they are emerging from or, indeed, where they are emerging to — but "sub-prime" markets doesn't have the same ring, does it?) I see from today's Lex Column in the FT that yields on Italian sovereign debt (Birks opinion, little better than shite, triple B minus) are a mere 20 basis points above that of Germany (Birks opinion, double A plus). The only logical exxplanation for this narrow spread is that investors continue to hold the naive belief that the EU will not allow a member's debt to default. That might have been the case when there were six, nine, or even 12 members, but I don't think it holds true now. There is a tangible, and not minute, chance that Italy will fall apart. There is a definite chance that it will default on its debt within the next 20 years — perhaps not up there with the chance of GM defaulting within the next five years (now happily sitting at above 50% probability), but a significant chance nevertheless. If I were in the markets, I'd be punting on widening spreads between triple A sovereign debt (T-Bonds) and, ahem, "emerging market" debt. Italy's yield will be somewhere between the two.
![[identity profile]](https://www.dreamwidth.org/img/silk/identity/openid.png){kind=small}
Now look what you've done
Date: 2006-01-14 02:56 pm (UTC)I've been saying the same thing about final salary schemes for years. The point against is that they generally benefit the most senior employees (who get huge salary increases in their final few years in order to boost their pensions) at the expense of those near the bottom, who are lucky to see their pension track inflation in some years.
There are two thoughts about the Bund/BTP spread: it shows concern either of a possible Italian default, or of Italy leaviung the Euro. This latter would would allow the Italians technically to avoid a default by peermitting them to print their own money again, which they can;t at the moment.
For the benefit of those readers who haven't looked at this, these two subjects are closely linked. The biggest problem for most developed economies is unfunded future pensions liabilities. The worst cases are Italy and Japan (the latter running at c 100% GNP), with France and Germany not far behind. Whatever else one thinks of the 1979-97 British regime, the one problem they did largely deal with was this one. This is the primary reason why joining the Euro is bad for Britain: we'd end up having to underwrite the continentals' shortfall, having already paid off our own. Of course, the French overtook the British in terms of GDP per head over that period, and this is one of the reasons why. They've been overpaying themselves for years, and we have to avoid paying the bill. In order to avoid this, good old Gordon is doing his best, through extra taxation of pensions, and the self-destructive minimum pension guarantee, to put us back into the same hole as everyone else. Why do I think this is not the right answer to the problem?
Now look what you've made me do, Pete!
Re: Now look what you've done (correction)
Date: 2006-01-14 02:57 pm (UTC)Re: Now look what you've done (correction)
Date: 2006-01-14 03:59 pm (UTC)I've just sent out a GH, but I found your address card outside its usual position, which means, I suspect, that I haven't sent you one. Should I pop a GH in the post?
I didn't want to get into the complexities of a Euro disintegration or Italy leaving the currency to go its own way. Should the latter happen, Italy would avoid a default by printing its own money, yes, but, since the likely reason for its going its own way would be a budget deficit so mind-thumpingly large that most investors would be vomiting profusely at the mere thought of it, then the price of Italian bonds would be at about a 200 basis point spread above German bonds anyway. So, whatever, you might not have lost the interest payments, but you would still have done your bollocks.
PJ
Re: Now look what you've done (correction)
Date: 2006-01-14 05:54 pm (UTC)I agree that 20bp is far too cheap for the cost of exit, but that just means that not many people take it as a serious chance yet. Of course, if you want to put the spread on today, you'll have to finance it at 20bps - around 160 currency units/month for every million nominal in the trade. Most people with a downside view will be waiting for the market to catch up with them, and do the trade in size. It's not enough to be right, you have to get the timing right, too. When it moves, it'll be fast and fat.
Back in the day ('98, Russian default), the punchline used to be 'Today in the submerging markets...'.
no subject
Date: 2006-01-14 07:00 pm (UTC)Matt
Close, though
Date: 2006-01-14 07:03 pm (UTC)PJ
Re: Close, though
Date: 2006-01-14 07:29 pm (UTC)(And I did know that John Cale was in the Velvet Underground at that time - hence the comment)
Gram Parsons on the hi-fi right now btw.
Matt
Re: Close, though
Date: 2006-01-15 11:17 am (UTC)..which is then followed by The Killers.