New reforms to the Pension Protection Fund were unveiled yesterday. The planned changes seem to have gone down pretty well, and no doubt the PPF itself has the best of intentions. But there is a snag, with implications that stretch a lot further than you may think. For the PPF reforms illustrate quite perfectly how regulatory bodies could end up making things worse for everyone.

According to the pink ’un, “companies with pension schemes heavily invested in equities will have to pay higher premiums to the Pension Protection Fund”. At least they will if the new recommendations are implemented.

On the surface it makes sense. Of course investing in equities is more risky than investing in government bonds. Therefore it is quite right that schemes that follow the more risky investment strategy should pay higher premiums.

It is just that if you step back and look at the big picture, things look different.

The problem with the economy right now is that investors are too cautious. Money floods into government bonds and gold, and to all intents and purposes lies idle. As a result, businesses are starved of investment. Growth stalls. Corporate profit growth slows, equities don’t perform so well, and as a result pension liabilities get worse.

It does seem regulators are too micro in their outlook.

Mortgage securitisation was heralded as a great new innovation, that, according to the IMF, greatly reduced the chances of a banking crisis. What regulators failed to take into account is that mortgage securitisation can backfire when everyone is at it, because banks may reduce risk by passing their mortgage debt on, but increase it when they buy mortgage debt from other banks. But this was not factored in. Banks thought they were being clever and had found a cunning way to reduce risk, so they took more risk, and as a result the chances of systemic failure rose. Regulators did not spot this flaw, and as a result we got the banking crisis.

The horrendous pension crisis in the making means that the only way baby boomers can have a decent retirement is if the money they save is used to stimulate the economy.

That means less money should go into government bonds, and more into business.

Looking at things on a micro scale, buying bonds is low risk, buying equities is high risk. Looking at the macro picture, the story is the complete opposite. And regulators don’t seem to have grasped this.

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