SeLFIES-Bonds Find a Sponsor Across The Great Lake

Last week, I wrote in my post section that I have ended my hobby of posting 5 posts a week on topics which I like to follow, namely economics, technology, environment and startups.

For the ones who breath a sigh of relief, I have some bad news. I shall continue to post in my article section any worthwhile updates on SeLFIES-bonds and retirement security. Naturally, this won’t happen every week. Thus relax...

However, this week there are indeed two articles. The first is a technical paper from Columbia by Assistant Prof Daniel Mantilla-Garcia at the Los Andes University and in a personal capacity, Dr Juan José Ospina Tejeiro, of the monetary policy directorate of the Central Bank of Columbia, no less.

The authors call SeLFIES-bonds “Bonos de Jubilación” (Pension Bonds) and argue that they should be a core element of the forthcoming restructuring of the Colombian pension system.

https://www.dhirubhai.net/posts/activity-6604749570670899201-MQxs

My Spanish is good enough to understand most of it but technical issues still escape me. It would be most welcome to have it translated into English. This is because, its description of the challenges facing both future retirees and the Columbian social security pension system as such, are so very much similar to what we are facing in the EU.

In particular, the authors write about an aspect of SeLFIES, I have long missed seeing being analysed and that is the issue of SeLFIES-bonds from the point of view of the issuer. I can see Dr Juan Tejeiro’s finger prints here...In most cases, this should be the state itself which is maintaining its own current social security pensions. The authors cover distribution, duration, hedging and financing mix issues.

The authors also neatly underline what Prof Robert C Merton and Dr Arun Muralidhar have long argued for, the paradigm shift of planning retirement in terms of a cash flow and not an accummulation of a notional value as wealth, for which we have no automatic or easy and cheap way to turn into a monthly income for the duration pensions are enjoyed.

Maybe other countries take up the work of these gentlemen and at the very least study the pros and cons of SeLFIES-bonds vis-a-vis current asset allocations, bond investments and social security funding.

The graph below (source included) gives us a perspective of the challenge of retirement security across the OECD. Given the current strike in France, her top place catches our eye. It is the first general strike in more than 20 years. Guess what. It is all about proposed pension reform and a timid one on top. The French government wants to end special pension plans made available to public-sector workers. France can no longer afford the 42 special schemes that enable railway employees, for instance, to retire from the age of 55 and which cost taxpayers about €8 billion a year.

Naturally, let us not forget that long years in retirement is also due to the good news on longer and longer longevity. This is why South Africa is last placed. There, the pension system is not in better shape because of structural reforms but because life expectancy is much lower, same as in Brazil. Portugal on the other hand, has a welcome long longevity but introduced pension reforms which mostly fly under the radar. Their true impact in practice is still to come. Germany already has old age poverty and this will be shown in the next article.

This is to show that the discussion around “Bonos de Jubilación” in Columbia would also have its place in the EU.

I leave you with the just released 11th annual Melbourne Mercer Global Pension Index (2019) comparing 37 retirement systems and covering almost two-thirds of the world's population: https://www.uk.mercer.com/newsroom/global-pensions-index-Low-adequacy-score-for-uk-means-employers-may-have-to-help-narrow-retirement-savings-gap.html?dysig_tid=a05ceacc476a4fa89a9f13a0d36513d1&utm_leadsource=voicestorm&userid=584&channelid=645&channeltype=LinkedIn.

By country, see where we are in terms of tradeoffs between “Adequacy” and “Sustainability”. The Netherlands is by far the most adequate and sustainable but this may have more to do with the strong governance and powerful regulatory oversight, than with the financial strength of her pension schemes by industrial sector. Even there, the government has to deal with underfunding due to persistent low interest rates. Coincidentally, one of my last weekly posts was precisely about what is going on in much admired Netherlands: https://www.dhirubhai.net/posts/ruiseybert_dutch-government-tries-to-avoid-cuts-to-pension-activity-6606937962653585408-oDj0.

No way we can continue like over the last decades. New thinking and new solutions are needed.