How your pension could be at risk…
Following the Deepwater Horizon oil platform explosion in the Gulf of Mexico in 2010, the fallout of the environmental disaster was immense (Keeley & Love 2010, p. 70). This became particularly evident as efforts to stop the leak failed, clean-up costs and damages mounted, totalling USD 20.8 billion and the markets became increasingly anxious about the nature of BP. Another element to the story was highlighted in newspaper headlines reading, “BP oil disaster sinks our pensions” (Keeley & Love 2010, p. 70). BP faced a £40 billion reduction in market value, as the corporation was a core holding of most British pension funds; this resulted in billions of pounds wiped from British pensioners savings. This demonstrates that the financialization of pension funds is a powerful issue and has become an integral element of OECD economies (Keeley & Love 2010, p. 70; Natali 2018, p. 449). Many citizens are or will inevitably be impacted by increases or decreases in pension values. This case illustrates that pensions should not be conceptualised as all-powerful (Keeley & Love 2010, p. 70). The collapse of financial markets subsequently leading to a great recession will have drastic and immediate effects on pension fund assets, with the ability to destroy gains accumulated over a lifetime and ultimately causing those in retirement or in that process to face significant financial hardships (Keeley & Love 2010, p. 70). Thus, there is a duty to the academic community to examine this. Since the 2008 Global Financial Crisis (GFC) reinvigorated this debate, financialization as a concept has been increasingly central to the contemporary examination of the changing political economies and welfare policies across the globe (Natali 2018). We appreciate that much attention has been paid here. However, within a global pandemic context, as national governments produce similar policies as seen in their attempts to counter the 2008 GFC, it is integral to examine the role financialization may play within the market in the relationship between Occupational Pension (OP) funds and the global financial markets. Especially when the elderly population’s entire financial independence may be in question.
OPs - Context
Today, OP’s (provided by employers as a regular income following retirement), are even more significant players within the global financial markets with assets totalling over $30 trillion, illustrating more than 40% of the assets of institutional investors (Sutcliffe 2016, p. 3; Citizens Information 2019). To this point, some OP funds control assets of over $400 billion, and the largest 300 OP funds each have average assets of over $50 billion. Within the UK, pension funds are equal to UK GDP, and US pension fund assets are 83% of the US GDP (Sutcliffe 2016, p. 3). Such statistics demonstrate the significance of pension funds as key participants in financial markets and how it is necessary to understand their roles in such.
More recently, the management method of OPs has been evolving with both the political and financial-economic policies of the state, in their efforts to champion active financial markets and institutional investors (Biondi & Sierra 2018). In conjunction with transnational harmonization and convergence of private and public sector accounting standards, enhancing financialization (Biondi & Sierra 2018). As financialization has become a major trend in Western economies, it illustrates the importance of examining the financialization-pension nexus. There are key cross-national differences concerning the range, pace, and structural results of the privatization and marketization of European pension schemes (Ebbinghaus 2015, p. 56). With this in mind, this paper will advance Natali (2018) but in light of a global pandemic to further undertake a comparative research analysis across Italy, the Netherlands, and the United Kingdom to demonstrate if and how financialization is a broad process affecting these three countries. More narrowly the nexus between their varieties of capitalism, pension systems and OP schemes. As a result, we are predominately concerned with what the challenges may be for the sustainability of these OPs (Ebbinghaus 2015, p. 56).
In that sense, our provisional thesis will examine if OP financialization is the result of the growing influence of financial markets in the pension arena or is it a dynamic interplay of actors, market and state? Through conducting such, we hope to shed light on this nexus to provide greater context in which to understand the financial sustainability of the state’s OP management mode. This may help assist policy recommendations concerning regulations for pension schemes (Biondi & Sierra 2018). To address this, we suggest implementing an analytical framework grounded in an actor-centered institutionalism and concerned with two factors: governance and path-dependency. As Natali (2018, p. 450) notes, the OP and financialization nexus is moulded by socio-economic institutions a legacy from the past of both the state’s variety of capitalism (VOC) and pension scheme – as well as its mediation by different actors.
Occupational Pensions & Financialization
According to Krippner (2005), financialization is considered to be the process in which profit is produced through financial trading routes as opposed to trade or production. It emphasizes the funneling of resources to the financial economy, increasing the importance of financial markets, financial motives, financial institutions, and financial elites within the economy in conjunction with the governing institutions across both national and international levels. As opposed to the funnelling of resources into the real economy (Krippner 2005; Biondi & Sierra 2018). At a micro-level understanding, financialization is the notion that individuals take personal responsibility for their long-term financial security and are intimately involved with the financial services industry to ensure this (Berry 2016, p. 22). Within this context, pension funds have been utilised as a high-potential policy mechanism to “collect material financial funds to be employed for financial investment and trading” (Berry 2016, p. 22). Pension funds typically invest across diverse enterprises in order to minimize their vulnerability to market shocks, like that of the BP Deepwater Horizon disasters, and enhance long-term profitability (Keeley & Love 2010, p. 70).
Within the last 30 years, key amendments in the definition and management of pension provisions have occurred as a result of government policy and influenced by capital markets (Biondi & Sierra 2018). Specifically, in 1994, the World Bank established a pension obligations framework grounded upon three-pillars: 1) a publicly managed pension scheme which required all members of society to participate within, in order to, alleviate poverty but not with the intention of providing a comfortable retirement; b) a privately held pension scheme that ideally supported all members of the population; and 3) voluntary savings by individuals (Biondi & Sierra 2018). This framework spurred debate among scholars in the field. McKinnon and Charlton (2000) stated that this three-pillar approach prioritized the financial sector issues over and above social welfare challenges in pensions reforms, which is problematic. Additionally, it is unstable in its growing dogmatic prioritisation of private over public sectors, and it has failed to acknowledge the inherent assumptions that historical patterns of retirement provisions have not considered the significance of public-private interface in the financial sector development in general (Biondi & Sierra 2018, p. 795). McKinnon and Charlton (2000), alongside other scholars (Dietz 1968; Naczyk 2013; Brown 2014), address the institutional evolution of pensions and their ties with economic, political and financial institutions. Largely, such literature finds that recent trends in pension reform have vested interests and lobbying by financial actors, and the present organisation of the pension scheme has been largely criticized for having become financially unsustainable.
Current contemporary literary debates on the interpretation of financialization of pensions, specifically the role of OPs, is divided. For some, such as, Trampusch (2007) OPs, provide an opportunity to counteract the process of financialization – a form of workers protection against the risks that may arise from financial markets. Similarly, Keune (2016) also highlights how the implementation or broadening of occupational welfare policies can help attempt to resolve the gaps within statutory and public welfare schemes. To this point, occupational schemes are able to compensate for reducing public sector protections under such collective tools and, in some instances, may be able to work as somewhat as an equivalent of public protection (Natali 2018, p. 453). These cases of collective mechanisms act as an alternative to the poor predictions of welfare state privatization in the post-industrial age and grant socialized alternatives.
For others, such as Natali et al. (2018), OPs and their recent reforms are namely consistent with the weakening of workers’ protection. Further advanced by Pavolini and Seeleib-Kaiser (2016), when certain pre-conditions are not met, OP schemes do not act as an equivalent to statutory public schemes but instead enhance inequality, uncertainty, and the role of the market. In states with fragile trade unions and industrial policies, OPs protect some employees but not others (Natali 2018, p. 453). Moreover, a-typical employees and lower-salaried individuals do not receive sufficient protections through OP schemes when they are based upon voluntarism and controlled by the employer. Further to this, Wehlau and Sommer (2004) specifically review the World Bank and European Commission pension frameworks. They find that these strategies will not enhance social welfare due to a lack of both theoretical and empirical grounding that financialization will improve the development of the financial market or spur economic growth. Instead, it is likely they will expose pensioners to significant risks regarding the size and real value of their pensions (Biondi & Sierra 2018).
What is evident is that there is no clear consensus on the role that financialization plays in relation to OPs.
Comparative Analysis – Empirical Evidence
Table 1. Italy, Netherlands & the United Kingdom’s three various pension systems and forms of capitalism (Bonoli 2003; Hall & Soskice 2001; Ebbinghaus 2015; and Natali et al. 2018).
This comparative analysis utilises three states, each with a differing VoC and differing pension scheme with specific modes of OPs. Italy is conceptualized as a mixed-market economy (MME). The state acts as a primary agent through the establishment of its large state-controlled business sector and the authority over the financial systems. Within MMEs, there are strong connections among firms and banks propagating patient capital provisions (Natali 2018, p. 453). Simultaneously, interest groups (both labour and enterprises) have a disjointed organisation. Interest groups desire a form of compensation from the state for their compliance. To this point, compensation typically comprises of passive labour market policies and a transfer-oriented welfare state (Natali 2018, p. 453). Public pensions are the first pillar of the Italian welfare system and issue generous high-level benefits that place their occupational pension scheme in the margins. Only 22% of the working population had private pensions in 2010 (Wilmington plc n.d.). OPs were formalized in legislation in 1993, largely within the context of welfare retrenchment and are largely based on collective agreements (Wilmington plc n.d.; and OCED 2008, p.220).
Comparatively, the Netherlands has a successful hybrid coordinated market economy (CME) with a tradition of a strong welfare state like Scandinavia, business relations with Anglo-American states, and a high degree of coordination, much like Germany (Touwen 2015). The Netherland’s three-pillar pension system is more successful than most Anglo-Saxon states. Their collective OP system based on sectoral collective agreements has broad coverage, with approximately 94% of all employees covered under a specific private OP (OECD 2017).
Lastly, the UK’s liberal market economy (LME) deals with competition, the operation of supply and demand in line with price signalling, and formal contracting (Natali 2018, p. 453). LMEs are considered “radical innovators” as their fluid labor markets enable easy access to stock market capital and profit imperatives (Natali 2018, p. 453; Hall & Soskice 2001). The UK’s multi-pillar pension system offers 1) voluntary occupational defined benefit pensions plans as either contracted out or not contracted out, and 2) a public pension that is a i) flat rate basic pension; ii) earnings-related pension; or iii) pension credit (Hall & Soskice 2001). In 2006, only 47.1% of all employees were covered by occupational plans; thus in 2012, the government rolled out the National Employment Savings Trust (NEST), an automatic occupational defined scheme to encourage contributions (OECD 2019, p. 20). OPs are established by the employer and controlled by them, solely operated under trust (Natali 2018, p. 453).
Given the current context, of a global pandemic and the over-financialization of many global economies, these such factors, if left unaddressed, may very well contribute to a future financial crisis (Brown 2014). If so, OPs, or otherwise the livelihoods of most retirees and worker’s pension savings may be at risk – leaving a highly vulnerable portion of society unprotected. Following an in-depth comparative analysis of the pension-financialization nexus in Italy, the Netherlands, and the UK, we hope to elaborate on the models of OPs in these states. In turn, with a view to clarifying and improving pension protection. OP financial sustainability and assurance is dependent upon their unique model, make-up and origins. With the analysis of these models, we will further develop policy recommendations regarding OP financialization (Biondi & Sierra 2018).
References:
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