Pension Funds Speculating in the Oil Market

This afternoon I heard Fox News analyst, John Gibson, do an op ed on pension funds being involved in oil futures speculation. He was right on the money … as he frequently is.

I also recall reading a short piece a week or so ago that Senator Joe Lieberman tried to introduce legislation restricting the ability of pension funds to invest in this speculative market but, apparently, he was severely beaten up by the proponents of this activity and backed off … unfortunately.

I also recall a state referendum on a South Carolina ballot several years ago dropping restrictions on the state pension funds allowing their managers to invest in foreign markets to “increase their yields”. Okay, I live in South Carolina. I was one of the minority that voted against this bill.

Members of pension funds are being told that the returns of the pension funds can be increased by moving the funds’ capital out of the American market into foreign markets as well as into commodities markets. Somehow, they aren’t also getting the message that, along with the potential for greater yields, there are also greater risks for loss.

The basis for the previous conservative investment practices in pension funds was the overiding principle of, at a minimum, exposing the principal to minimum risk with sustained gain, generally in blue chips stocks paying dividends or solid companies with realistic growth potential. No one has a crystal ball but a good financial analyst can realistically minimize the risk to the capital he’s responsible for.

Why the average person would decide to put his or her hard earned retirement funds at risk is beyond me … other than they’ve been sold a bill of goods by a fast talking person in a suit who probably otherwise wouldn’t be trusted if he were met on a used car lot. It’s the fundamental pitfall encountered by gullible people when approached by con men … an appeal to their sense of greed.

My suspicion is that, in spite of any increased yields that might be realised by riskier and more speculative activities, the basic retirement payout rates probably remain unchanged, being adjusted only by cost of living increases and based on initial pay in … probably capped to otherwise maintain the “integrity” of fund.

So, who actually benefits from investing in foreign markets or in the commodities markets?

The fund managers. Who else? They get a percentage of the returns. The more the fund makes, the more they make. But, I doubt if they pay any penalties if the fund actually looses money. It’s not their money that’s being put at risk.

Pension funds have, at least, billions of dollars. A lot of this money was pulled out of the market last fall with the collapse of the housing market and the subsequent financial crisis that ensued. With billions of dollars literally sitting on the sidelines not making any money, the pension fund managers have gone to practically the only game in town … oil speculation.

I recently heard a very seasoned financial analyst say that the current market is one that even professional investors can’t understand and need to stay out of. That’s a cue for the rest of us.

Pension fund managers, by investing in the oil commodities market, are betting on the price of oil staying high and going higher. Even if that approach does earn you another ten or twenty dollars a month in five, ten or twenty years from now, how much is it costing you today?

Of course, that assumes that, for some unpredictable reason, the price of oil doesn’t all of a sudden go down forty or sixty dollars and your retirement is wiped out. How much will that “oops” cost a lot of people looking forward to a “secure” retirement?

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