With a simple analysis The Golden Investor wants to point out the extreme hits Dutch pension funds got over the last few weeks. In this article The Golden Investor uses some simple graphs to show the vulnerability of pension funds to carbon-intensive sectors. The current corona crisis will expose this and again, the working class will bear the losses.
Using charts from a report from the Dutch Central Bank (DNB) The Golden Investor will show in a few steps why pension funds will most certainly cut pension benefits at the end of this year. In a survey done by the DNB the central bank tried to estimate the risk for the financial sector in a sudden energy transition scenario. The chart below shows that the survey was done on a majority of the Dutch financial market.
In the report a possible carbon bubble in financial sectors is discussed, the hypothesis is that it could be the case that financial markets overestimate the value of fossil fuels and therefore could be at risk if this possible bubble bursts. Negative effects will not be limited to the oil, gas and coal sectors. The report addresses that businesses which are active in other carbon-intensive sectors, such as electricity production, heavy industry, agriculture, real estate and transport, may also have to contend with write-offs in a sudden energy transition scenario. Assets that are dependent on fossil fuels, such as coal-fired power stations, blast furnaces or greenhouse farms, may no longer be profitable. The Golden Investor wants to point out that whether this bubble may or may not have existed does not matter anymore. Due to the corona outbreak the market for fossil fuels is at rock bottom and the Dutch financial exposure to these sectors is significant and will trigger the start of a deep recession.
This second chart points out a huge vulnerability of pension funds to the fossil fuel sector. More worrisome is the amount of exposure to commodities by pension funds, which in this chart show direct investments in commodities, futures contracts and fund investments in commodities. Remember the negative oil prices for May oil futures two weeks ago, Dutch pension funds may have been exposed to this. Even if this is not the case, all fossil fuel commodities and equities have seen big hits during the corona crisis and Dutch pension funds have high exposure to losses in this sector due to the large portion of fossil fuel commodities in their portfolios. A fun comparison: the direct investments in renewable energy account for approximately 0.3% of total assets of Dutch pension funds.
When taking into account the losses in the overall carbon-intensive industry during the corona crisis, the pension funds show even more vulnerability. In comparison to Dutch banks, the pension funds have a relatively big exposure to the hardest hit industries. In combination with the large scale corona central bank quantitative easing packages and the long term downward interest rate trend, this could be the trigger for the first big pension fund defaults on the long term. That pension funds will prove insolvent is imminent, with the unlimited quantitative easing policies we can say goodbye to healthy pension funds.
“The loss of value of carbon-intensive assets, such as production resources, could have a greater impact on the value of other businesses, owing to the longer useful life of such assets. If the change is sudden, the total loss of value may be significant.”
This quote perfectly portrays the corona vulnerability of businesses, the sudden loss of production will be destructing to a lot of normally well-functioning companies.
The low yield on safe government bonds has pushed pension funds towards riskier fossil fuel assets. The corona crisis has now hit both sides of investment: safe havens face downward yielding pressure by central bank interventions and the private sector investments have been hit hard by the global lockdown. You don’t need to be a finance or investment expert to know that this is going to have huge consequences for pension funds, especially those with exposure to commodities and the energy sector like the Dutch pension funds.
Pension Benefits Will Be Cut This Year
One thing is certain, pension funds will cut pension benefits at the end of this year. At first this maybe won’t have big consequences due to the possible deflationary scenarios. However on the mid-term all this quantitative easing will cause double-digit inflationary periods which are far greater than the percentage economic growth. As a result of the quantitative easing addiction of financial markets and fiat currency fallacies, pension funds will be the first financial institutions to fail amid these circumstances. During these inflationary periods pension funds won’t be able to increase well-deserved benefits for pensioners, resulting in big troubles for governments trying to satisfy a greying population whose purchasing power will decrease. If these expectations come true remains uncertain, but The Golden Investor remains bearish on a V-shaped recovery for the hard hit global economy. The economic roller coaster just started, and that financial markets are going up is no guarantee that there won’t come a second downturn, or worse, that the global economy derails.
Disclaimer: The Golden Investor is not a fortune-teller, be sure to make the right decisions in accordance to your own financial situation, this is not investment advise or anything like that
1) De Nederlandsche Bank N.V. (2016). Time for Transition: an exploratory study of the transition to a carbon-neutral economy. 14, 92. Retrieved from wos:A1995QQ81000001