Where next with the financial crisis? Pension Fund default?

30th January 2012

It is useful for people to know what has happened in the past, but more importantly it is useful for people to know what will happen in the future or at least what is likely to happen. Due to the uncertainty in the financial markets and the possibility of default in many countries across the world, a prediction of the likely events that will unfold would be of great benefit. One observation of the financial situation is the high level of debt in both the private and public sector. It seems unlikely that the level of debt outstanding can be paid off especially with the growing level of unemployment. UK private sector debt is around £1.46 Trillion and rising, in addition to that the public sector debt exceeds £900 Billion and it is expected to rise to over a Trillion pounds in the next year. 65% of the public sector debt is from domestic investors. The majority of the domestic debt is lent by pension funds and insurance companies making up 40% of all of the public sector debt creditors, including overseas investment.

This is what terrifies me. The most likely outcome of this situation is default on a large scale. Even if it is not complete default, meaning a complete write off of debt, a partial default on a large number of debt contracts would still mean a huge loss of investment capital. As such a large percentage of the debt is from domestic pension funds and insurance companies, a default on this scale would cause many of these institutions to fail. This is what I predict to be the next step that unfolds during the economic deterioration that will take place over the next few years. I foresee pension funds and insurance companies collapsing due to their inability to pay dependents or claimants directly as a result of bad debt. This will be created from the indirect investments these firms have made with financial institutions and governments. Who I feel will have difficulty generating capital to repay even the interest on the money lent, let alone the initial investment. The knock on effect of similar institutions that fail and the fear of closure or an inability to ‘make good' on agreements, will deter people from such products and will make the situation even worse for the remaining pension funds and insurance companies.

It is a horrible thought that so many people could lose their pensions or not get a pay out on their insurance claim. I do not think the government would be able to intervene if one or more of the big pension providers went into administration due to the existing level of debt it holds.

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