John Clancy takes aim at pension fund admin fees

How much money is there in the world? What is the world’s wealth?

How about $117 trillion? Or, with all the noughts, $117,000,000,000,000.

That’s how much all of the assets under management all over the world are estimated at. TheCityUK.com estimates this figure every year and that is its latest 2011 stab.

This must be what makes the world go round, mustn’t it? Money. Wealth.

The markets, the trading floors, the traders, the fund managers, the high-finance financiers, the hi-octane dealers that we see in the background whenever economic and high finance stories break on the news. They churn that around and use it to deploy a vast daily power of life and death over companies, currencies, governments and, well, people the world over. The markets decide. The markets have spoken.

That must be the $117 trillion speaking. Private money capitalism, global capital; whatever you may call it.

Well, first of all, who actually owns those assets in management? Is it all private capital flowing through the hands of the fund managers?

According to the latest 2011 annual Capgemini World Wealth Report, $28trillion is in the hands of about 11 million High Net Worth Individuals (HNWIs), being managed for them by their, I’m sure, desperately grateful portfolio managers.

The majority of them live just in the USA, Japan and Germany. About 454,000 of them live in the UK. There were 13,000 more of them in the UK than in the previous year. So times are not exactly tough for HNWIs recently.

There are about 7 billion people globally, so these HNWIs represent 0.16% of the world’s population. You are probably in the other 99.84%.

In the UK, the HNWIs make up 0.73% of the population. You are probably in the other 99.27%.

These HNWIs globally have another $14 trillion or so (what’s a trillion or so between HNWI friends?) in other conventional funds, such as pensions, mutuals or insurance funds.

You are a HNWI if you’ve got $1 million available to invest. You are an Ultra High Net Worth Individual (Ultra-HNWI) if you have $30million or more to spare. There are about 95,000 of them worldwide.

If, by the way, you are unlucky enough to have less than $1million, but more than $100,000, you are merely ‘affluent’ or (horror-of-horrors) a Sub-HNWI.

So, clearly, a  large chunk of the money-go-round of invested global wealth comes from private individuals. This could, then, be classed as private wealth.

One has to ask, though, what the health of this wealth would be now without all of the bailouts and injections by governments and ordinary taxpayers the world over to prevent massive collapses of economies and their financial institutions?

The banks and insurance companies (and their assets) were saved from collapse mainly by the 99.84%. The by-product of the bailouts and interventions at the beginning of the financial crisis was, of course, to keep the 0.73% HNWIs rich; and probably made them richer.

The markets, left to themselves, would probably have sent many hurtling into the sub-HNWI bracket for good. The sordid world of the merely affluent awaited them.

What all of the wealth surveys agree upon, though, is that the biggest sector of the world’s $117 trillion is made up of the world’s pension funds. Over $30 trillion is invested globally by them

This is the rock-bed of the markets. Even the big sovereign wealth funds we hear so much about, from China and the Middle East, with little more than about $5.4 trillion between them, are wealth minnows compared to the pension funds. Although the SWFs are admittedly more likely to be have more powerful short-term and liquidity impacts on markets.

Without the pension fund bedrock, the international markets and international investments would be even more volatile and liable to huge swings and inevitable cycles of bubbles and collapses. The HNWIs need the pension funds to be there. They can, and effectively do, act to protect their wealth.

Pensions funds will also underpin, make viable, lower the costs and increase the returns of the wider funds they form a crucial part of. PIMCO (one of the world’s biggest fund managers) will manage public sector employee pension funds alongside private HNWI funds in one investment pot, for example.

Then we have to question whether this big $30 trillion global pension fund foundation to the investment markets can really be classed as private wealth. It’s certainly not the wealth of a few HNWIs. It’s more likely to be from the meagre savings of the public sector sub-affluent the world over.

Approaching 70% of the world’s top 300 largest pension funds are current or former public sector workers’ savings for retirement. The biggest players in the markets are national and local government employees’ funds. Japan and Norway lead the way with $trillions in play. The California Public Employee Pension fund ($250 billion in assets) or Canada’s Ontario Teachers’ Pension Funds (which owns 48.25% of our very own Birmingham Airport, by the way) are major players in the world’s markets. The 99 UK Local Government Pension Schemes (if combined) would be the 3rd biggest pension fund in the world. Private sector pension funds are small fry.

Ironically, the administration fees charged to the global public and private sector pension funds in themselves effectively create many of the world’s HNWIs in the biggest get-rich-quick scheme on the planet. The OECD’s annual pensions systems survey highlights the high frequency of administration fees based upon 0.5% of entire pension funds’ assets under investment every year; and sometimes over 1%!

0.5% of $30 trillion is $150 billion income (not capital) leeched from the world’s pension funds every single year. This mega-income must go a long way to establishing the savings fortunes of the planet’s HNWIs and Ultra-HNWIs.

So the besuited traders, bankers and high financiers in the money-go-round ‘markets’ who stalk the world’s currencies, states and businesses and whose actions are meant to speak so objectively may, in reality, be servants of the public sector.

If only the world’s Low Net Worth Individuals, upon whose savings the HNWIs feed and upon which the markets of the world are based, had the same power over the way the worlds ‘markets’ operate, how differently might the world’s current problems be being addressed?

And if you can get $150 billion a year in fees, who needs a pension?

Courtesy of The Birmingham Post