Too many of us take for granted that we will one day be able to retire, and retire with dignity!  Unfortunately, a proper retirement is becoming a pipe dream for most of us.  If you are among the select few in the private sector that receives the benefit from or currently participates in a defined benefit plan, consider yourself to be extremely fortunate.  Corporate DB plans may soon be as rare as a NY Mets championship.  Employees in the public sector still participate at a high rate (roughly 87%), but there is growing pressure on their plans to shift the liability from municipalities / counties / states, etc. to the individual participant through defined contribution plans.  By whatever means you have, you should fight this trend!

At KCS, we have written a number of articles on the importance of DB plans to individuals, families and more broadly, our society.  These articles are available on our website at http://www.kampconsultingsolutions.com.  I would encourage you to review some of our thoughts on the subject, as your future retirement may just be on the line.

Asking an untrained individual to make retirement decisions for their own account is a formula for disaster! Yet, that is precisely what we are doing by transferring our employees into defined contribution plans.  Asking an employee making less than $40,000 / year, who has a spouse and children, to divert a portion of their compensation to fund a retirement program is a JOKE!.  Life gets in the way, and it is silly to think that individual can safely put away enough to generate even a modest retirement income.  Allowing a participant to have access to their retirement assets prematurely is a structural failure! 

It is shameful that most of us in the investment industry have done extremely well financially by picking at the DB carcass, while too many participants can’t retire. SHAMEFUL! It is time that we as an industry rally around the issue of retirement security, and begin to pose real solutions to this crisis that adequately places the risk on the shoulders of those that can handle the responsibility before we don’t have anyone retiring in this country.  Just imagine the social, economic and political implications of that development!

We may not witness the first default of a China WMP on January 31st, as it appears that a “plan” is in place to repay those that contributed, but the rescue may create a moral hazard that will only exacerbate future problems with WMPs.

Here is the latest news out of China courtesy of Quartz.

ICBC: Now more “reliable” than ever. Reuters/Jason Lee

 

As we wrote last week, the fate of China’s $5 trillion shadow banking system has been hanging on a $469-million investment vehicle that looked in danger of defaulting at the end of this month. Today, reports Bloomberg, a solution seemed to appear, when Industrial and Commercial Bank of China (ICBC) told investors that they would be able to recoup the money they had put in by selling to “unidentified buyers.” (Caixin reports that ICBC, the Shanxi provincial government and the trust company, China Credit Trust, have located a strategic investor (link in Chinese) who will buy the rights to the WMP from customers.)

But the news raises as many questions as it answers, and sets a dangerous precedent.

The investment, a wealth-management product (WMP) called “Credit Equals Gold #1,” was being used to finance a loan to a coal company gone bust. For ICBC to bring in new investors to take it over is a bad precedent for two reasons: First, it’s widely assumed that loans made in this way are guaranteed by the government. Second, people generally see their WMP investments functioning like higher-yield deposits—the way people in the West might keep cash in a money-market fund instead of in their checking account—implying that they’re free of risk.

Those assumptions are behind the reckless inflation of China’s shadow credit, which David Cui, economist at BofA/Merrill Lynch, calls “one of the biggest moral hazards in the financial market globally in recent years,” in a note published earlier today.

The outcome of Credit Equals Gold #1 was the big test-case for these assumptions. By mollifying customers, ICBC and the other parties involved risk making this moral hazard much, much bigger.

In all fairness, the alternative was likely to be much more painful in the short term. WMPs put banks in a tough spot. Letting customers swallow the losses would force all of China’s WMP customers to “see clearly the risks,” as Jiang Jianqing, chairman of ICBC, put it on Jan. 24. And that might deter people from investing in WMPs—a dangerous thing for banks, which see WMPs as a vital source of profit growth.

​Responses to an online survey conducted by Sina Finance on behalf of CITIC, which also sells WMPs.

It also would have come at a risky time, given that money is unusually tight in the run-up to Chinese New Year (which falls this year on Feb. 1), and especially right now because jitters in Argentina and Turkey in the last few days have made emerging-market investors nervous.

Reassuring customers that their investments are guaranteed means shadow bank funding will continue for now. But at some point soon the central government will need to confront the moral hazard bailouts create. Demand for credit is surging, as you can seen in the chart below. That might be due to the combination of banks’ year-end scramble to meet cash requirements set by regulators as well the typical uptick in demand for money just before Chinese New Year.

​ BofA/Merrill Lynch

But as BofA/Merrill Lynch reports, the pace of defaults on trust loans is picking up (here’s just one example of that trend). More than 100 billion yuan ($16.5 billion) in mining-related trust loans alone come due in 2014—and given that falling coal prices are throttling profits, many of these companies will struggle to come up with that cash.

That means regulators will have to address the moral hazard problem soon, at which point “things may get ugly rather quickly,” writes Cui. ”After all, the stability of the shadow banking sector is based on public confidence and we all learned from the subprime crisis that confidence is a fickle thing when the ground below is crumbling.”

Thanks to Mark Grant, I became aware of a potential financial issue facing China’s banking system.  It seems that China’s banks have created products with inflated “promised” yields in the 5%-8% range.  Here is an article from International Business Times on WMPs.  One of these WMPs has already informed their investors that they may not have the cash to pay them back on January 31st.  The product needs to repay investors nearly $500 million, and the ramifications from a default could send shock waves through the global markets.