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The role of pension funds in the cost-of-living crisis
A new investigation by Lighthouse Reports shows that several pension funds in Europe are heavily invested in commodity markets and are contributing to the rise in prices.
For the last few months, I along with some much more talented reporters across Europe brought together by the Netherlands-based non-profit newsroom Lighthouse Reports, have been digging into whether pension funds around the world have been contributing to the cost-of-living crisis and food insecurity. The answer, unfortunately, is yes for several funds we investigated.
One part of the investigation that looked at European pension funds was published last week.
What did we find?
We found that some European pension funds are heavily invested in commodity derivatives that include food commodities. This is partly why the cost of food has jumped as much as it has in the last couple of years.
Currently, the price of wheat, for instance, is almost twice what it was in December 2019. And that's after prices have declined by 30 percent since May this year.
One of the world’s largest pension funds, the dutch giant ABP, had invested 33.9 billion Euros in commodities at the end of 2021. That is more than 6 percent of its gigantic 550 billion Euros portfolio.
It has increased its stake in commodities substantially. Between 2020 and 2021, ABP’s commodities investments increased by 30 percent. Since 2018, they have more than doubled.
Agricultural commodities account for about 30 percent of ABP’s commodity investments. That contributes quite directly to the rise in prices of food making it unaffordable for millions around the world.
In the United Kingdom, some pension funds more than doubled their investment in commodities between 2019 and 2021. Pension funds in Denmark also had sizeable investments in commodities markets.
Why is that a problem?
Investment of pension funds in commodity markets is problematic on many levels. The first is that their investments lead to higher prices.
Ann Pettifor, one of the few economists who warned that a global financial crisis was coming before it did in 2008, explained to us in an interview what happens when a wall of money chases a finite asset.
“Take an asset which is finite – whether it be grain, property or energy: when a wall of money is aimed at that finite asset, the wall of money inflates the price,” she said.
Inflated prices of something as existentially fundamental as food means that if prices go beyond what people can afford, they begin to cut down on both the quality and quantity of food that they eat.
As Amartya Sen showed all those years ago but still needs repeating once in a while: Famines happen not because there isn't enough food, but because people can't afford it.
Food insecurity has risen dramatically in the last few years, particularly since the beginning of the pandemic. More than 10 percent of the world’s population is now undernourished and 4 percent faces starvation.
So, on one level the problem is that investments by pension funds are raising the prices of food and contributing to food insecurity.
Then on another level, pension funds bear a special responsibility because they represent the ordinary citizen. By investing in commodities, the pension fund is making the cost-of-living crisis worse for its members.
It is “particularly egregious” for institutions like pension funds to engage in such investment behaviours, according to Jayati Ghosh, professor of Economics at the University of Massachusetts Amherst.
“These are funds set up by workers and they have their money from workers, and then they're engaging in actions which destroy the living standards of those workers,” she told us in an interview.
That's not all. Commodity markets, because of the way investors enter and exit, have also turned quite volatile. So by investing in these markets, pension funds are also putting in jeopardy investments of the general public.
What about the good news?
We did find some good news. A majority of the pension funds we investigated are not invested in commodities at the moment.
Some pension funds, like the Belgian KBC, explicitly stated that they won't be involved in “food speculation.”
Another pension fund in Finland has a policy in place of no direct investment in “food speculation.”
In other news
India’s ranking in the global hunger index has slipped once again. The world’s fifth-largest economy is now ranked 107th out of 121 countries behind Sudan, Pakistan and Burkina Faso. There is particular concern around chronic undernutrition among children in India, with figures for wasting being the highest in the world. The proportion of India’s population that is undernourished has increased in the last eight years from 14.8 percent in 2014 to 19.3 in 2022.
Nigeria is suffering one of its worst floods in decades. More than 600 people have died, 1.3 million people have been displaced and over 200,000 homes have been destroyed. The floods have also impacted neighbouring regions of Chad, Cameroon and Niger. Damage to crops has led to growing concerns over food security in the region.