Many Canadians are seeing their retirement savings take a massive slide with the markets and don’t understand why.Certainly there is some risk because the funds invest in the markets, but most mistakenly believed that they were minimal and never expected to see their hard earned contributions decline on principle.
Pension funds work on two fronts.They work on the long term equities markets where the bulk of investment is, or should be secured, and they work in the credit markets.Yes, credit markets where most of the turmoil is occurring.The exposure of the funds depends entirely upon the fund’s exposure to the credit markets and many funds have left the windows wide open.They are the ones seeing the greatest volatility and reduction in value.
Funds often loan to short sellers then reap the profits (which have been substantial in the past) as the short sellers “gamble” with the fund’s equities (money).While this has worked in the past the problems that have emerged to this have shown that many funds ignored the risk factors of exposure in this practice.
To put this in simple terms, this is like you lending your friend a portion of your paycheque each week so he can use it to sell his company’s loans services.Is it a risk you would be willing to take?In the good times it worked; that is until the amounts being loaned were not generating the capital to maintain the values of the loans.This is the credit side of things.When the risks of getting the returns fell that money loaned was at risk.A lot of people got hurt and they could have seen it coming but were instead happy with “superior growth” in the past with their investments.They failed to ask why this growth was out of step with the markets.Had they done so or been savvy enough to understand the system, they would have been alarmed.The funds were essentially playing poker with the investor’s money.
Canadian banks were a part of this, of that there is no doubt.They all have investment divisions that play on the international markets and they all loan money for investment on the short term.The balance of that short term loan as opposed to the long term secured lending is the risk factor.Canadian banks are also fairly well regulated but there are loopholes as we have seen some of them have taken very, very serious losses due to the balance of risk.The Canadian government doesn’t see a need to change the rules or regulation on our banking system.They may have a point but equally one has to ask why these banks were open to the significant losses in the first place.It is a question no one wants to answer.To do so will close a regulatory loophole.
The problem as this writer sees it is one of perspective.The government and the banks don’t see the money as belonging to Canadians but rather to the banks.This is a very one sided view that is in large part folly.The international credit crisis is the real problem and the solution has to be international.The largest part of the problem lies with the United States and its regulatory system; or more specifically, lack of.
Canada, needs to go to the international table and argue for increased regulation and oversight, not by the financial industry itself, but rather by arm’s length government agencies.Self regulation has not worked in the past due to the potential abuses from greed.This is exactly the problem now identified by American and other governments worldwide.
There is a need to protect the banking and investment systems but that protection has to have an eye on the people whose money it is using.That has been the overwhelming failure of the system and the system has to protect both sides of the equation; equity and credit.One cannot exist without the other and establishing a balance is the challenge being faced by governments around the globe.
Canadian’s pensions will come back but it will take years.The question remaining is will the boomers who have lost so much money be able to recover it before they have to convert their RRSP’s to RIF’s?If not, those losses will be permanent.In the meantime, the anticipated growth of their investments has gone.Now they can only hope that the funds will recover to pre-crisis levels.
Government’s role in this is unmistakable.The question is will they act prudently or with ideological intent?If the latter, they will argue for little change to Canada’s system and contribute little to international change.
Canadians need to pay close attention.Retirement is looming for many and that may not be as golden as predicted in the past.