The Irish government are planning to introduce a “mandatory” supplementary pension scheme for all workers who are over the age of 22, and earning over a certain threshold. The full details aren’t yet concrete, but the general idea is to try and force the employed population of Ireland to save more money for their retirement and not depend solely on the government supplied pension.

The scheme isn’t actually mandatory - it’s more of a constant nag. Employees may opt out of the scheme, but will be auto-enrolled every two years, meaning if you don’t want in, you’ll have to opt out manually every two years.

While I applaud the idea - we all should be trying to put aside money to live on when we finish work - the execution leaves a lot to be desired. I am planning for my retirement, but haven’t yet started a pension. Instead, I’m managing money for myself and my family in various savings and investment accounts to try and get the best return on the money. I don’t appreciate the nanny-state forcing me into a pension scheme I don’t want to be in every two years.

Economically, I see a lot of fallout from this decision also. On the consumer side of the equation, I can see our already high pension fund fees increasing. The pension funds will have a captive market and not much competition meaning they can all steadily increase their fees. All this will achieve will be the passing of considerable amounts of money from lower and middle class working families to upper class financial “gurus” (who proved their recklessness in search of profits can bring entire industries to the brink of collapse, only to survive by being bailed out by taxpayers).

Another effect of this legislation that’s immediately obvious to me is that employer pension scheme incentives will likely decrease to the 2% minimum over a number of years. If your current employer is generous enough to match your pension contributions above 4% of your salary, why would they continue this when the government says they’ll share the load with employers at 2% each if you put 4% into your pension? So to those who are saving through an employer pension scheme, this will reduce the overall amount being put aside for your retirement

While it seems that some employers can save money by reducing the amount they have to put into employees’ pensions, any employers not already doing so will be required to pay into them. This will increase the labour cost in our already uncompetitive economy, and will be a further burden on small & medium sized businesses (on top of tax and social contributions).

As well as all this, the government say they’ll contribute an amount equal to 2% of the employee’s salary to the pension scheme. Dare we ask where the government will get the money to make these contributions going forward? Will it be another case of money going to the National Pension Fund, which is then plundered for political requirements (eg. bailing out insolvent banks)? Will the money actually be there when it comes to retirement time? If the government are to meet these future obligations, the most likely method is tax increases - eg. a 2% increase on income tax will cover it, but it just means you’re putting 6% of your salary into your pension and your employer is putting in 2%. And, while the government probably won’t be as blatant as an income tax increase, the tax increases will come in somewhere, and you’ll end up paying for it in some way.

So, what a great deal our nanny-state has come up with for us! Auto-enrol us every two years into a scheme where we pay 4% of our salary in fees to some financial “guru”, pay an extra 2% in taxes and your employer must also contribute an amount equal to 2% of your salary to the financial “guru”. Hopefully, some of this money will make it into a retirement account earning some miniscule percentage so that, when you retire, you can supplement the measly government pension with a further measly amount from your “mandatory” supplementary pension.

But, on the bright side, at least the pension fund managers will have a nice comfortable life and a happy retirement with your money!

I just e-mailed the below to the five TDs representing my constiuency (Limerick East). I suggest anyone opposed to the NAMA legislation do similar. We need to voice our opposition to those charged with representing us.

The below may be used in full, or in part, by anyone wishing to contact their TDs. You can find a list of all TDs email addresses here.

Dear Sir / Madam,

As a resident of your constituency, I’m writing to ask you to oppose the forthcoming vote on the National Asset Management Agency (NAMA) legislation. I believe this legislation is bad for Ireland and the Irish taxpayer, and will end up costing us more than we will gain from it.

NAMA is to be charged with relieving the banks of this country of the impaired loans they are holding, in the hope that this will allow the banks to recommence lending to businesses and consumers. Unfortunately, this is based on assumptions that I believe will not unfold as the Government expects.

Firstly, in purchasing the impaired loans, a price will have to be agreed. It has already been stated that NAMA will purchase the loans at above-market prices. However, the market for the properties has collapsed, meaning finding the current market price is difficult enough, without trying to estimate a future value for the assets. Since prices haven’t yet stabilised, current market prices are likely to be biased towards the inflated valuations of the last number of years, without giving full consideration to the (very likely) scenario where valuations fall below a fair value before recovering to a fair market price. The amount paid for impaired loans can only have one winner - either NAMA purchases the loans at a discount, allowing it to profit from the sale of the assets; or, NAMA purchases the loans at a premium, allowing the banks to minimise their losses (or possibly make a profit) but increasing the loss incurred by NAMA and the Irish state.

Secondly, the assumption that banks will recommence a similar degree of lending as that leading to the property bubble is nothing but a dream. The banks caused their current grief by not adequately vetting borrowers before lending them money. This goes for both business and consumer lending. Does the Government really think that, once freed of their current basket of impaired loans, the banks will swiftly commence populating a new basket?

Lastly, with rock bottom interest rates being held by central banks, and quantitative easing occuring globally, inflation, possibly hyper-inflation, is just around the corner. We are meant to believe that the leaders of our various fiat currencies are connected enough to see the inflation coming and quickly stamp on it before it gets out of hand. I, personally, see much higher inflation rates before the excess liquidity is absorbed back into the central banks. This will only serve to give the illusion of profit in the NAMA portfolio, since our media report only the simple “facts” of economic situations. In fact, we will have lost money on these assets due to the erosion of the purchasing power of our money through inflation. This simplified situation doesn’t even consider the cost of running NAMA.

The major correction currently underway consists of two parts. First, over-indebted people are reducing their debt load; and second, house prices are returning to a fair value. Over the last 10 years it became increasingly more difficult for the average person or family to purchase their average home. This could not continue forever. And, because people are now spending less, the consumer economy is contracting, causing job losses. This enters an infinite loop of spending decreases, job losses and debt defaults which will not be fixed quickly. This problem has to work itself out. By preventing the necessary business closures and bankruptcies (through legislation like NAMA), we are only prolonging the pain and pushing the recovery date out further.

I hope the above gives you some food for thought. Please don’t accept the Government’s estimates at face value. Rather, look at the overall trends, and notice that NAMA can only be a good deal for the Irish taxpayer if the loans are purchased now at a steep discount.

Regards,

John Madden.

I just read an opinion piece titled “Signs of hope on world economy” on the Irish Times website and wanted to write some of my thoughts on it.

Surely the comments of Ben Bernanke, or any economic advisor, holds very little weight now. If these people really are the experts they’re believed to be, and can mystically foresee the path of any economy, whether local or global, they would’ve foreseen the current crisis two years or more ago and worked to combat it then.

The recovery in the consumer market, if present at all, will be short lived. Current trends in the US show household savings approaching 5%, up from the 0% of the bubble epoch. They also show average household income decreasing - understandable when you consider the number of jobs being lost. In short, the US consumer cannot simulataneously earn less money, save more money and spend more money.

A recovery in the housing market cannot take place until the stock of foreclosed properties that banks are holding onto are sold. We’re also still waiting on hundreds of thousands of “Alt-A” mortgages, sold in the US, to reset to higher interest rates, and force even more foreclosures. Lastly, even if consumers are spending slightly more than they did 6 months ago by using debt again, this cannot last for long because the US is already the largest debtor nation in the world, and eventually, it will be unable to find people to buy its debt at such low return rates.

What I suspect is happening is that the US, whose citizens seem to pay more attention to stock prices than European citizens do, see a rally in stock prices and suspect things are not as bad as they thought 6 months ago. However, this rally will end, and stock prices will fall below where this rally started. I suspect the cause of this rally could be seemingly attractive prices of company stocks. This would be based on previous earnings, and an estimate of future earnings. This can make stock price-to-earnings ratios look attractive now, but this is based on earnings in the bubble epoch. Future sales will not approach these levels, and when the future earnings fail to meet expectations, stock prices will begin to slide downwards again.

Don’t be fooled by this bounce - it is not the recovery we all await. In order for a true recovery to take place, the world must first start to pay down its debts and return to a more solid base from which to grow. Printing money, no matter how much of it you print, will not initiatate a true recovery.

I read a lot of news articles, blogs and email newsletters relating to the economy and investing. Recently, Ireland has been mentioned more and more often. The general opinion outside of Ireland seems to be that we’re balancing on the edge of a cliff, and looking more likely to fall off than regain our balance.

Everyone has heard about the banking system collapse in Iceland, followed by protests and riots, the demise of the country’s currency and eventually the dissolution of its government. You’d think Ireland must be in a better position than this - after all, we’ve yet to even have the public services go on strike! But, as it turns out, Iceland’s estimated 2008 current account deficit is $3.25 billion; Ireland’s is over $8.6 billion (information taken from the CIA Rank Order - Current account balance). Out of a total of 188 countries ranked, Ireland comes in in 167th place.

So far in 2009 we’ve seen Anglo Irish Bank nationalised, followed by a spate of controversy over concealed director’s loans and loans to investors from Anglo Irish used to purchase shares of Anglo Irish. Whatever about the controversy, this piles another huge amount of debt onto the Irish current account, pushing our deficit even further. Following this, we’ve seen downgrades of Irish bank debt (eg. Irish Life & Permanent), further recapitalisation of Bank of Ireland and AIB and a letter from the former chairman of Nationwide Building Society saying the institution cannot survive without Government support.

On top of this, the European Commission has criticised the Government’s recovery plan, calling it too optimistic and saying it lacks clarity. The commission is recommending that Ireland face excessive deficit procedures, which amounts to a kind of peer pressure imposed by the rest of the EU on Ireland to sort out its balooning deficit. The two largest economies in the EU, France and Germany, believe they may need to bail out some of the smaller more “cash-strapped” members (one of those being Ireland).

What got us here, I believe, can not just be blamed on the worldwide credit bubble which built up after the dot-com crash. I believe blame lies also with a loose fiscal policy by the ECB coupled with a greedy Government that did nothing to subdue a rampant housing market. As well as this, the money the Government made from allowing this boom to continue was wasted (eg. Electronic Voting Machines, among other half-baked badly researched plans), and now when we need it, we don’t have it.

In the last few days I saw another article about Bank of Ireland offering low rates for the first year for first time buyers. Though not specifically stated in this article, I believe this decision was influenced by the agreement on the €7 billion bailout agreed with the Government. What happens after the first year, when the interest rate “would increase by a minimum of 75 basis points”? What happens over the next few years as inflation really takes hold, and we see interest rates above 5 and 6 percent? It looks to me like we’re just setting up the next round of foreclosures. After all, in America they called these “Alt-A Mortgages”. You get reeled in by the attractive rate for the first year or two, then get hit with much higher payments when the interest rates reset. We’d be better off leaving the market to decide a more appropriate price for our houses than trying to sustain a level of pricing above fair value by attracting people into the market. Anyone considering buying a new house should feel confident that they’ve paid a fair price for what they got and ignore what it was worth at the peak of the market. Just because you got something for half the price it used to be doesn’t mean you got a good deal!

I also believe that the bank rescues are a bad deal for taxpayers. Our Government has already shown that it can’t manage money well, by wasting billions of euro over the last 10 years. What makes them think they can run a profitable bank? And, of course, if they can’t (that should be when they can’t), it’s the taxpayer who has to support it. The banks should be let fail, and the viable parts sold off to pay off some of the bondholders. The shareholders and bondholders knew, or should have known, the risk they were taking in buying the shares and bonds. They should have to realise the loss from their bad investment decision, not be supported by taxpayers.

As a last point on this, I think the Government’s method of trying to recoup some money by imposing a pension levy on public service workers is unfair. The public service in Ireland, by and large, is badly run. The proper levels of accountability are not present, allowing people to get a “job-for-life” in the public sector, and do very little work. I believe if there was proper accountability, from the level of minister down to desk-jockey, we’d have a better run and cheaper public service. I do believe that the public service pension is a huge bonus (I heard figures quoted to say a private sector employee would pay 25% of their pay for a similar pension plan) and should either be taxed or removed, but the way the Government is implementing this now is wrong. They’d be better off to reduce numbers and improve productivity in the public sector. The pension levy can then be included in future employment contracts, and can be made sustainable through the contributions of those who will be receiving it.

This rant has been building for a while - apologies for the length of this post! If you have any comments on it, email them to me. I’ll update the post with any comments I receive.

Today, Bloxham Stockbrokers released 10 policy options for the Irish government to “protect the domestic economy while positioning Ireland for future sustainable growth”.

While I agree with most of them, points 1 through 3 I don’t agree with. These are

1. Cut taxes. (only way to boost consumer confidence is through increased disposable income)
2. Restore confidence in the housing market. (cut stamp duty further)
3. Remove the logjam in the banking system. (get NTMA to fund cheaper mortgages)

These three points focus on trying to sustain, and further inflate, an unsustainable bubble. The economic growth of the last number of years has been built on cheap and accessible credit, and on everyone spending themselves into large amounts of debt.

Bloxham want to give consumers more disposable income, in the hope that it’ll trigger them back into a spending spree. The US tried this with a tax rebate, and it hasn’t reignited their economy. I think, however, that the recent economic downturn will prompt people to be more prudent with their money. I suspect many of them would use it to pay down debt, and I doubt it would prompt people back into a debt-fuelled spending frenzy.

When Bloxham talk above about restoring confidence in the housing market, what they’re really saying is to give potential house buyers more money now so they pay elevated prices for property. The housing market in Ireland, as in the US, Spain, the UK and elsewhere, is deflating. Trying to keep house prices artificially high by enticing people to buy now will only serve to prolong the pain. House prices need to fall to more reasonable levels before people will have the confidence to buy into the market again.

The last point above, having the National Treasury Management Agency fund mortgages, will only serve to increase the national debt and leave Irish tax payers covering the defaults. There’s good reason why people can’t get large mortgages - the lender doesn’t think they can repay it. Over the last number of years, mortgages were given out to people without their income being properly stress tested. Banks are now imposing more stringent checks before handing out the cash. By making mortgages easier to get, these checks would become more lax, and we’d end up with the same problem we have now in another few years time.

Luckily, the rest of Bloxham’s points should serve to strengthen our economic position. I’m not sure if selling state assets to cover current expenses is a great idea, but since they didn’t expand too much on the points, I’m not sure if this was their intention.

There was more bad economic news last weekend, with the announcement that Henry Paulson, the US Treasury Secretary, and Ben Bernanke, the Chairman of the Board of Governors of the US Federal Reserve, were stepping in to support the two largest mortgage lenders in the USA, Fannie Mae and Freddie Mac.

Fannie (FNM) and Freddie (FRE) are Government Sponsored Enterprises (GSEs), set up to originate mortgages to American people wanting to buy houses. Because of their status as GSEs, their debt was implicitly backed by the US Government, though this backing seems to now be explicit.

However, they were also able to borrow money themselves at lower rates than the general market, meaning they could make larger profits on the mortgages they lent. A statistic I read today said Freddie Mac had $1 in equity for every $50 it holds in assets (which includes mortgage securities). That’s a lot of debt to be repaid, particularly when you consider the trouble Americans are having right now repaying the mortgages they took out, and also when you consider the falling value of the properties used as collateral for those mortgages should they need to be sold to cover the loans.

The subprime woes of the United States, coupled with the high amount of leverage used by banks originating loans, have beaten down financial stocks this year. I do believe that these stocks will recover, but I suspect this recovery isn’t going to start until at least 2009. There’s likely to be more bad news and further writedowns and losses before the recovery starts.

I’ve just read up on some of the Lisbon treaty. Ireland are the only country in Europe that will be holding a referendum on this treaty. It’s due to take place on the 12th of June.

One major issue I have with this treaty is giving the EU power to set our taxation levels.

The European Central Bank (ECB) already controls our money supply and interest rates, as it does for all countries in the euro zone. Currently, inflation in the euro zone is at 3.6%. However, inflation in Ireland is currently at 5%. Our economy is not tightly linked to that of mainland Europe.

We’ve lost control of our money supply, by joining the euro. It essentially leaves us with taxation to attempt to control money circulating in our economy. I know taxation is a very political issue, and is only altered once a year during the government’s annual budget. But, increasing tax will reduce money circulation, reducing tax will increase it.

A topical example to illustrate this : if the government were to increase tax on petrol and diesel, it could aid in reducing inflation. Initially, it would cause an increase in inflation, but as people felt the pinch, they’d use cars less, buy less fuel and, over the medium to long term, lead to a reduction in inflation.

I, personally, would not like to see the last semblance of monetary control we have handed over to Europe.