Shine A Light

Trust us, we’re bankers. Why we should all fear for our pensions

Starting this week, eleven million workers in companies without a pension scheme will be automatically enrolled into a new pension fund. It’s called, reassuringly, NEST (National Employment Savings Trust). But it’s managed by scandal-hit investment banks. We republish Mel Kelly’s exposé from October 2011.

Mel Kelly
2 October 2012

Public sector workers understand what’s happening to their pensions. That’s why they’re threatening mass strike action. The government wants to take an extra 3.2% from their gross salary to fund their pensions. (That’s a 50% increase for many.) 

But most private and public sector workers are oblivious to the government’s planned raid on their wages. If you don’t have a pension scheme in place, you may soon find yourself forced into one – whether you work in the public or private sector. And your money will be managed by investment banks mired in scandal.

Today the House of Lords will consider the final Commons amendments to the government’s Pension Bill. It could gain Royal Assent within minutes of deliberations ending.

If enacted, gradually from October 2012 any worker over 22 and earning more than £7,474 will be automatically enrolled in the new National Employment Savings Trust (NEST). It’s expected to be the UK’s largest pension scheme. The government will take a minimum of 8% in pension contributions, at least 5% from every auto-enrolled worker’s salary (1% of which is in the form of a tax rebate) and 3% from employers.

NEST will take 1.8% of our payments in ‘contribution charges’ plus another 0.3% of the whole fund each year in management charges. Nest Corporation, the trustee body of NEST, has handed a 10 year, £600m administration contract to the Indian outsourcing giant Tata Consultancy Service (TCS). Headquartered in Mumbai, Tata will control the web-based enrolment, record keeping, contribution collection and details of each individual’s retirement pot.

There are all manner of worries about NEST.

Morrisons Supermarkets told the Work and Pensions Committee : “The fact that employees must be opted in by the Company before they can be opted out by the Scheme appear to be over-proscriptive and time-consuming and has the capacity to harm employee relations.” The Morrisons workforce includes a large number of part-time, young and foreign workers. The company is obliged to auto-enrol up to 60,000 workers in October 2012 – peak trading time — and expects most of them to opt out. They’ll have to wait up to 5 weeks for a refund.

As for workers who cease their scheme membership, NEST explicitly denies them the statutory rights they have under current private sector pensions — the choice of a cash transfer sum or a contribution refund.

But there are much bigger worries. This past February, NEST announced plans to subcontract management of the fund to investment bankers UBS, State Street and Black Rock.

Who are these people and can we trust them with our pension fund?

UBS — headquartered in Zurich and Basel — is having a rotten time.  The United States government is suing, alleging that UBS sold dud investments to mortgage providers Fannie Mae and Freddie Mac, resulting in losses of more than $900 million that contributed to their eventual collapse.

Just last month UBS owned up to a £1.3 billion loss (or maybe a £2 billion loss, or maybe more) due, it claims, to the unauthorised activities of young trader Kweku Adoboli. (How on earth did they let that happen?)

UBS is already facing unquantified exposure to claims relating to the United States subprime scandal, the Madoff fraud, the Lehman collapse, and other infelicities. You can read all about them in the annual report.

Boston-based State Street is also taking up a lot of investigators’ time and energy in the United States.

In January 2008 State Street Global agreed to reimburse Alaska state employees almost $6 million after the state’s Department of Revenue charged State Street Global Advisors with mismanaging retirement accounts.

According to State Street’s annual report, in 2009 the Attorney General of California took action against State Street alleging they defrauded the state’s two biggest public pension funds of $56 million on currency transactions between 2001 and 2007.

The Attorney General is seeking more than $200 million in damages claiming that State Street overcharged on the transactions and concealing the overcharges by entering false exchange rates into its own databases and in documents, Bloomberg reports

Then in February 2010 the Securities and Exchange Commission (SEC) found State Street Bank was misleading its investors about their exposure to subprime investments while selectively disclosing more complete information to specific investors.  State Street agreed to settle the SEC's charges by paying more than $300 million. 

In February 2011, the Arkansas Teacher Retirement Scheme filed a complaint in Boston alleging that State Street overcharged its clients on currency transactions. According to Reuters, the Arkansas fund alleged that State Street's "unfair and deceptive FX practice has generated as much as $500 million in profits annually." 

And in May this year, the Securities and Exchange Commission launched an inquiry into investors being overcharged millions of dollars for foreign exchange transactions by State Street.

State Street’s 2010 annual report indicates they also have massive exposure to Lehman ‘entities’ in the US and the UK and that in the UK alone the administrator may force State Street to pay hundreds of millions of dollars.

Ok, all right, so we don’t feel totally safe with UBS and State Street. Don’t panic. There’s also Black Rock.

Oh dear.

The Chairman and chief executive of Black Rock, American citizen, Laurence D. Fink, was sacked from his first job at First Boston Bank after his rogue trading lost the bank so much money they had to be bailed out by Credit Suisse, reported Forbes.

Fink bounced back and went on to establish Anthracite Capital and Black Rock.

When Anthracite Capital filed for Chapter 7 Bankruptcy liquidation in March last year, they walked away from a property deal which they managed on behalf of a California Public Employees’ pension fund (according to the Los Angeles Times) which lost $500 million as a result

Mr Fink told Vanity Fair “I don’t care if the whole industry blew up, our job is to do better than the industry, and we didn’t in real estate.”

“BlackRock's Larry Fink helped popularize the same mortgage-backed securities that nearly poisoned the banking system. Now his firm is making millions cleaning up these toxic assets,” CNN money reported.

In July this year Black Rock appointed Paul Gilbody as a Director in their UK Operation. (Paul just happened to be the Strategy Director of NEST!)

So the people our government trusts to protect our pensions — UBS, State Street and Black Rock — don’t exactly inspire confidence. Still, don’t panic. Chancellor George Osborne is looking after us.

Speaking after news broke of UBS’s potentially £2 billion-plus ‘rogue trading’ hole, the Osborne said: “it is pretty clear that totally unacceptable things were going on in UBS.”

Well spotted, George.  Would he invest his family’s multi-million pound fortune in NEST?

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