On Target Newsletter

In this issue:

  • Pension funds

  • Banking for expats

  • Trump, Biden and the generals

  • Weaponizing the dollar

  • US investments

  • Passports for sale 

  • China’s human growth potential 

  • Offshore wind

Pensions: Easy to Promise, Hard to Fund

For most people, pensions are a boring subject. It’s a long-term problem – complicated, seemingly beyond the understanding even of the financially sophisticated, and beyond anything we can do about it. We think. Until it hits us personally. When it’s too late to deal with.

Few are willing to face up to the problem. And it’s a big one. The brutal truth is that no society, even the most responsible ones, are accumulating enough to provide for when we retire, and what we’ve been promised.

A report from an international body of experts (the Group of 30) published last month estimates that pension funds of the world’s top economies have deficits that totalled $1.1 trillion in 2017. Without radical changes, by 2050 the shortfall will explode to $15.8 trillion. And that’s using optimistic assumptions about economic growth, incomes and returns on investments.

Pensions funding has become a sea of red, an ocean of promises that, longer-term, can never be met.

And it’s started to smash into our faces. The best-managed funds in the world, those of the Netherlands, facing the need to cut the pensions of two million retirees, are being forced to weaken their tough regulatory standards. The governor of Illinois, the US state with the worst shortfall in its retirement fund, has been forced by political backlash to retreat from pension reform. Pensions have become a major issue in countries such as Russia, Japan and Brazil. In some, such as Chile, there are even riots triggered by pension reforms, or lack of them. In Britain lecturers at universities have been on strike protesting a rise in deductions from 8 to 9.6 per cent of their salaries to plug a hole of £6.6 billion in their pension scheme, the nation’s biggest.

The evolving global pensions crisis has several causes…

► The burden of retirees is growing both in numbers and as proportions of populations.  Thanks to medical advances, better nutrition and healthier lifestyles, more people are staying alive for longer. The average number of years spent in retirement is growing. And many retire at an earlier age. In America the average period spent in retirement has risen from 13 years in the 1960s to 20 today. 

proper accounting, the full costs of those promises do not become clear for decades, by which time the politicians and bosses are long gone.”

► Lower investment returns threaten to devastate pension funds. In 1980 American retirement funds could earn interest on ten-year Treasury bonds, for example, at almost 16 per cent; now they’ll only get about 1.8 per cent.

The models that fund managers use for their planning typically assume an unrealistically high rate of annual return such as 7 per cent. With interest rates close to zero, capital gains are needed to close the gap. To achieve those means taking on much more risk – a dangerous strategy for funds that, by the very nature of their liabilities to present and future pensioners, need to avoid risk.

► A new problem is the emergence of negative interest rates, a consequence of central banks’ policies of keeping them ultra-low and buying the safest government and corporate bonds to force down their yields to stimulate economic growth. It means that funds that must invest continually (incoming contributions and proceeds of maturing securities) are being forced to buy some assets that will yield no income at all.

Another problem is that the lower interest rates go, the greater the damage to pension funds. To calculate the current value of assets and liabilities, funds have to discount them. Typically this is done using yields on bonds whose lives match those of the fund’s assets and liabilities. Ros Altmann, a former UK pensions minister, says a one percentage point fall in long-term interest rates increases the liabilities of a typical pension scheme by around 20 per cent, but the value of its assets only by about 10 per cent.

If actuarial analysis reveals that a fund is not likely to be able to meet its current and future liabilities to pay pensions, there are three ways to fix the problem – increase investment returns, cut pensions (both those already being paid, and the level of future payments), and raise the contributions being levied from or on behalf of those who haven’t yet retired.

Solutions… all of them nasty

The first way is actually getting harder as the kinds of investments acceptable to funds are becoming scarcer. Cutting pensions outrages everyone, and in some cases cannot be done because of legal restrictions. That only leaves the option of imposing higher contributions by workers and employers… also guaranteed to trigger outrage, and to be fiercely resisted by labour unions.

As the solutions are all so unattractive, even those aware of the problem are reluctant to face up to it. They’re kicking the can down the road.

Individuals are unwilling to save more. Taxpayers resent the idea of paying for the retirement benefits of others (“let them provide for themselves”). Executives prefer to channel corporate resources into activities from which they can benefit personally. Politicians shy from courting unpopularity with voters by offering immediate pain for long-term gain. Governments lie about their long-term liabilities by simply ignoring them when reporting national debt levels. Retirees are outraged if their pensions are cut to protect the security of the funds paying them.

Those who manage retirement funds have to allocate a big chunk of their investments to conservative, low-yielding securities because they cannot jeopardize their ability to keep promises to pay pensions years, even decades, in the future. As new contributions flow in and longdated bonds mature, where are the monies to be invested?

Equities are an obvious option, but they are always exposed to volatility (fluctuating market value) much greater than bonds. In a desperate hunt for yield, managers have invested in alternatives such as directly-owned real estate, infrastructure funds, private equity, venture capital, untraded loans to companies. For long-term investors who can accept illiquidity in return for the promise of higher returns, these can make sense. A housing project or toll road can produce a bond-like, steady income stream. But all these investments are riskier than the bonds of major nations.

One dramatic example of how damaging falling interest rates are to the finances of a pension fund is that in a recent year the Bank of England, which understandably insists on impeccably sound management of its staff fund, boosted annual contributions to the fund to 55 per cent of salaries paid.

A popular metric has been that savers who put away 8 per cent of their income every year for 40 years would be able to build an income of 75 per cent of their final earnings by the time they retired. This approach worked with inflation-adjusted returns averaging 5½ per cent a year. But if returns drop by only two percentage points, savers will need to put aside almost 15 per cent of their income.

Neither governments nor those who vote for them are facing up to the changes that must be made – because the options are so unpalatable. “We will have to save more, work longer, and simply lower our expectations,” says Joachim Fels of Pimco, the bond fund manager.

In Europe many schemes do no saving to pay future liabilities

There is wide disparity between the health of pension funds. In America private-sector funds have to be valued according to yields on corporate bonds, but public-sector schemes are allowed to value using much higher discount rates. Some states and cities have a history of much sounder financial management than others, but almost none runs one that is fully funded. Their large deficits are a looming crisis for cities such as Chicago, Fort Worth, New Orleans, Philadelphia, Dallas, and states such as Illinois, Kentucky, New Jersey

In Europe governments typically provide 80 per cent of retirement incomes, but on an unfunded basis — there’s no state saving to accumulate resources to pay future pensions. No one tells voters they’re on the hook for the money governments will have to find in future, or that their retirement incomes will turn out to be very much less than they expect.

No country has a pension system that could be judged as first class, according to the Melbourne Mercer Global Pension Index. In many, governments are seeking to implement reforms that stealthily shift investment risk on to individuals, reduce what they can expect to get, and require them to retire when they’re older.

Almost every year those who need to provide for income on retirement by buying annuities are getting less for their capital. In Britain annuity rates have been falling for a quarter-century. They’re now less than half what they were in the late 1990s.

In the developed economies of the OECD, back in the 1960s there used to be seven workers for each retiree. Now that’s fallen to four. By 2060 the ratio will shrink to just two. The number of workers supporting the aged with their production is going to halve. The burden of the elderly on those at work is going to double.

Younger generations, who in any case tend to be less keen on saving, are going to be forced via higher contributions and taxes used to underpin underfunded retirement funds to pay more for their future benefits that will be far less than those enjoyed by their parents. And no doubt they’ll use their political leverage to cut current benefits.

The lesson to everyone who is happy to leave the responsibility for financing future retirement to public schemes such as state pensions is… don’t. Or at least, attempt to reduce your future dependence on them by giving more attention to accumulating personal wealth.

Banking in a Foreign Country

By Peggy and Chad Creveling

If you are a part of an expat household, it may not at first seem necessary to open a local bank account in the country where you and your spouse live and work. However, there are several reasons why you might choose to do so. Simply put, having a local bank account can make managing your overseas finances easier and cheaper.

Using a local account means you and your spouse can receive salary and overseas fund transfers, pay local bills, and have ready access to the local currency, while also minimizing fees on international ATM transactions and foreign exchange.

To help you get started banking in a foreign country, here are some considerations and tips:

Choosing a Bank That Fits Your Needs

Once you and your spouse have decided that having a local bank account will be helpful in managing your overseas finances, the next question becomes: Which bank should you choose? In some cases, your spouse’s company may dictate where salary must be deposited. But if you are free to select your bank, here are a couple of pointers to help with your selection:

Convenience: Where are branches located, and what are their operating hours?

Language: Can you communicate with the bank’s staff?

Services provided: Does the bank provide expats with services you are interested in, such as savings and checking accounts, debit cards, online access, multi-currency options, and bill pay?

International transfers: How easy is it to transfer funds overseas, and what are the fees?

Other fees: How competitive are charges for services such as ATM withdrawals, checkbooks, and local fund transfers?

Online access: Does the bank have a consumer website, what language is it in, and how user-friendly is it?

Telephone access: Is there a bank consumer hotline available in a language you understand, and how long do you have to wait on hold before you can talk to someone?

Depositor protection: How safe are your deposits? Are they insured up to a certain amount?

Interest income: What rate does the bank pay for deposits? Can you invest in fixed deposits with excess cash?

Customer service: To gauge the bank’s overall level of service, check with other expats about their banking experiences.

Opening an Account

Once you have selected a local bank, it is time to open accounts. At a minimum, consider opening a savings account with ATM or debit card access, and, if available, a checking/current account as well as a local-currency credit card. You will want to apply for joint access to the accounts, so plan a time when you and your spouse can go to the bank together.

Check in advance as to what documents you will need to bring with you. At a minimum, you will need your passports or other personal IDs, and depending on the local rules and regulations, you may also need to show evidence of where you live (rental agreement or utility bill).

You (or your spouse) may need to bring a work permit or other proof of employment. Finally, in some countries, banks may also ask to see a copy of a statement from your home-country bank.

Joint Accounts

In most cases, it makes sense for you and your spouse to have joint access to your new local bank accounts. However, be sure you understand in advance what “joint access” means in your local country — it may be different than what you had previously understood. For example, be clear whether one or two signatures are required on withdrawal slips or checks, and whether either party can initiate foreign wire transfers or close the account.

If necessary, consider getting a local power of attorney drawn up that covers the account so that either of you can enact critical financial transactions in case of an emergency or the other’s absence.

Keeping Track

As with any bank account, you and your spouse will want to keep records of the cash flows in and out of the account. But while most banks will send you monthly statements, these may get delayed or lost in the mail. If it is available, sign up for online access to your account. This will enable you to balance your finances on your schedule, rather than waiting for a monthly mailing.

To further help in keeping records, consider using a personal financial software program to track your accounts. Multi-currency programs like Quicken can be invaluable to expatriates not only in helping to track all of your bank accounts (foreign and home), but also in keeping accurate records of your household’s income, expenses, and other financial assets.

For Americans: Reporting Foreign Bank Accounts

If you are a US citizen, be aware that there are extra tax filing requirements for Americans with overseas financial accounts. Some of the forms that you may need to file include: FinCEN 114 — Report of Foreign Bank and Financial Accounts (FBAR); Form 8938 — Statement of Foreign Financial Assets; Form 8621 — Information Return for Passive Foreign Investment Company (PFIC).

The Crevelings are Thailand-based CPAs who advise expats on personal financial planning and investment. To learn more, visit their website www.crevelingandcreveling.com

Trump, Biden and the Ethics of American Politics

An American friend comments that the reported outsourcing of hospital treatment services for emergencies that patients are finding unexpectedly costly is just one example of “a cultural shift in ethical standards in the US.”

Trump, he says, “is the ne plus ultra of this trend, but the main difference between him and other politicians is that he disposes with hypocrisy, makes little effort to hide his corruption, and is in fact proud of it when confronted.”

Biden provides an instructive example of how conventional politicians behave: they adopt a public face of probity and devotion to the public good while family corruptly benefit from the politician’s position and connections.

“The means might be a $50,000/month sinecure for the politician’s son on the board of directors of a company in a foreign country over which the politician has substantial influence, a $300,000 fee to give a speech to investment bankers after leaving office, or some similar scheme that offers plausible deniability.

“The beauty of the system is that politicians don’t have to sully their hands by vulgarly demanding wads of cash in a brown paper bag. It’s all tacitly understood and arranged with the requisite discretion. That many see a kind of refreshing virtue in Trump’s open and unashamed corruption is emblematic of our degenerate culture.”

Trump and His Generals

The well-known British expert on the Mideast, John R Bradley, says that although Donald Trump’s instinct is to end America’s “endless wars” and disengage from the region, he’s so hopelessly out-of-touch in managing international affairs that he has to rely on the generals to guide him.

Trouble is, they have very different needs. “The most obvious reason is that the US annual defence budget is at least $1 trillion (and growing,” Bradley writes in The Spectator. “There is no group more determined to keep the wars alive (and the money flowing) than the military top brass.”

The president’s announcements such as the complete withdrawal of American troops from Syria and pulling-out from Afghanistan were promptly followed by reversals, as “Trump defers to generals and men in uniform.”

It is now clear that he is not the president that those opposed to US military involvement in foreign conflicts hoped he might be. The reason is that perpetuating wars, while pretending to end them, “is the least risky path for him to take electorally.” However… he is the first US president in two decades who has not started a war.

Using the Dollar as a Weapon

By “weaponizing” its currency – using its great importance in global trade as a means of applying political pressure (in international sanctions against Iran, for example) – the US is encouraging countries to disengage from the greenback, as much as they can. It’s called shooting yourself in the foot.

Resentment against what many regard as the unfairness that the power of the dollar allows the US to exploit its position is nothing new. It goes back decades. What is new is that developments that have nothing to do with dollar dominance, such as Donald Trump’s unconventional foreign and trade policies, are raising the temperature of hostility to the greenback.

The European Union president Jean-Claude Juncker put foreign critics’ position well in his State of the Union address last year: “It is absurd that Europe pays for 80 per cent of its energy import bill – worth €300 billion a year – in US dollars when only roughly 2 per cent of our energy imports come from the United States. It is absurd that European companies buy European planes in dollars instead of euro.”

It’s not surprising that Europe, as well as China and Russia, are now acting decisively to have more of their international trade denominated and financed in their own currencies.

The Outlook for US Investment Markets

Because of the risks of economic slowdown in the US and elsewhere, and of a recession in corporate earnings, “almost no one believes this is a good time to buy cyclical assets,” Bloomberg’s John Authers reports on a UBS strategy forum in New York. “Discussions focused on defensive assets with recession-proof revenue strains… and on whether they are now too expensive.”

What can investors do to protect themselves? Most seem to think that the US and China are likely to survive the fight over trade relatively unscathed. UBS’s Asia-Pacific strategist Min Lan Tan suggests investing in companies that will benefit from increased spending on infotech in China, and on beneficiaries of supply-chain resets such as Vietnam and other parts of emerging Asia.

Other interesting points…

► The invcstment community is probably now reconciled to the threat of a big wealth tax from presidential contender Elizabeth Warren, “that nothing good can come of complaining about extra taxes for billionaires.”

► There is plenty of talk about investing in themes such as demographics, robotics, gene therapy “and other compelling if sometimes alarming narratives.”

Citizenships and Passports for Sale

Selling citizenships and the passports that go with them is a booming business. Transparency International estimates that a total of around €25 billion has now been invested by people seeking so-called “golden passports.” In the decade to 2018 they were the gateway to residence and easy travel in the European Union for some 6,000 new citizens and 100,000 new residents.

At a “global citizenship” conference held in London last month perfectly legal second passports were on offer… for cash. Allen Chastenet, prime minister of the Caribbean island of Saint Lucia (population 180,000) offered “a comfortable place to live,” with citizenship within three months and a passport giving visa-free travel to 145 countries including the UK, the European Union’s Schengen Area and Singapore. The cost? A contribution of $100,000 to the “national economic fund.”

Also selling citizenships at the conference were senior officials from other Caribbean islands such as Antigua and Barbuda, and from European nations – Cyprus, Malta and Montenegro.


Gold mining companies: They’re much better positioned to benefit from the next bull market, suggests precious metals investment consultancy Incrementum. Here are some of the positive developments in the sector…

►Cost transparency: All-in sustaining cash costs have become a benchmark in the past few years, increasing comparability and transparency.

►Write-off or sale of high-priced projects: Numerous exploration and development projects have been sold or put on hold. Balance sheets have been strengthened and $30 billion in write-downs made. Operating leverage in the sector has fallen from 1.6 times to 1.1.

►Takeovers are no longer paid in cash or debt, but mostly in own shares.

►There has been a slight trend towards increased investment in exploration.

Supply chains: American companies have been considering reducing their dependence on factories based in China since Trump launched his trade war, but they’re finding it hard to implement. Some use their China-based production to supply markets in China, so diversifying doesn’t make sense. Others can’t find alternatives in other countries – one company says it cannot relocate as elsewhere “there is simply not enough manufacturing capacity.”

The FT’s Gillian Tett warns that reshaping supply chains will be a painful exercise “that will be a downward drag on many American companies’ operations and earnings for a long time. Sadly, the cost of protectionism is now being baked into corporate plans.”

India: The government has announced its biggest privatization programme in a decade. It has decided to sell its entire stake in the country’s second biggest oil refiner and in its largest shipping company, as well as reducing its stakes to below 51 per cent in some firms. It also plans to liberalize its stringent laws on hiring and firing workers following measures such as cutting corporate tax rates, streamlining banks and forcing through bankruptcies.

Premier Narendra Modi is acting to boost confidence in the economy, whose growth rate has been plunging, and to bridge a widening fiscal deficit following dismal tax collections and $20 billion of tax cuts.

Agriculture: It’s the thing to invest in now because it’s so depressed… “a nightmare,” says the well-known American iconoclast Jim Rogers.

The average farmer in America is 58 years old; in the US more people study public relations than agriculture. In Japan the average age of farmers is around 66. In the UK the highest rate of suicide is in agriculture. In India millions of farmers have committed suicide over the past few decades.

So globally, it’s a disaster. But remember what the Chinese call weiji – a disaster is often an opportunity. “Learn about how to be a farmer… or about agricultural commodities.”

Pharmaceuticals: The industry’s large companies have effectively outsourced research and development to the speculative biotechnology sector, Eoin Treacy says in FullerTreacyMoney.

They are prepared to pay for companies with products approaching commercialization. The announcement this month of the first successful trials for a CRISPR anti-viral drug point to a quicker pace of innovation. It’s evolving quickly, so there are going to be some big winners if developers can work out the most effective business models.

Negative interest rates: Looking to the future, they’re likely to get much worse, predicts Kenneth Rogoff, professor of economics at Harvard university. “One day we will get a new severe financial crisis, and then we will need negative interest rates of minus six or minus five per cent to get out of the crisis quickly.”

In Germany, where savers have become very angry about the policy imposed on them by the European Central Bank, almost 60 per cent of banks are now imposing negative rates on deposits of corporate clients and 20 per cent are doing the same for individual customers.

Emerging markets: Their shares have been rising strongly for several months, probably in anticipation of better economic growth. This year the developing economies have experienced their lowest growth rate for a decade.

Many analysts are forecasting a pick-up next year. Hopefully they will be luckier with their predictions this time. Citi bank says the IMF has over-estimated emerging economies’ future growth in its forecasts for every year since 2012.

Absolute return funds: They were sold as an ideal investment for savers who got burned by the financial crisis, on the promise they could deliver stable positive returns… although at higher fees. Many funds have failed to do so. In the UK they’ve been hit by a tidal wave of redemptions because of underperformance. The best-known one, Standard Life Aberdeen’s Global Absolute Return Strategies, has lost more than half its assets over the past year.

Eroding confidence: Popular trust in the idea that monetary policies can sustain growth and employment, and that central banks have inflation under control, will be seriously tested in the next recession, says precious metals investment consultancy Incrementum. “The spread of the loss of trust in other pillars of the Western world such as the media, the financial system and the judiciary could have devastating consequences.”

Forecasting: According to a study by Fathom Consulting, the International Monetary Fund has correctly predicted only four of 469 economic downturns since 1988. It has never predicted a recession in any industrialized country with a time lead of more than a few months. Private-sector economists have done no better. Out of 153 recessions in 63 countries, only five were forecast by their consensus in April of the preceding year.

Fracking: The threat by leading Democrat presidential candidates to ban this controversial technique to release oil and gas from tightly packed shale will have a huge impact should it come about. The US has been able to more than double its crude oil production over the past decade largely because of fracking, and there are still huge hydrocarbon deposits to be exploited using the technique.

NATO: Turkey has refused to approve its new military plans to defend other member-nations – Poland and the three Baltic states – unless NATO agrees to formally recognize as terrorists the Kurdish militia YPG operating in northern Syria on Turkey’s border.

South Korea: It’s been told by the Trump administration that in future it will be expected to pay $4.7 billion a year to cover its share of American troops based there – a 400 per cent increase.

Wise Words: 
Remember the point of financial markets is not to make you money, but to devise ever more elaborate ways to take your money. 
John Dizard

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