Monday, July 07, 2008

Pensions may benefit and become more stable because of high oil and commodity prices


Defined benefit pensions may be getting a boost from higher commodity prices, particularly higher oil prices. This could be a silver lining; for retirees who do have pensions and who otherwise must deal with higher prices on fixed or limited incomes, pensions could become more stable and less endangered to termination if commodities provide the returns that make up for the lack of sufficient pre-funding from the normal processes of accounting and measuring corporate profits. That is the view of an article on the front page of The Washington Post this morning, by David Cho, “Pension Funds Boosted by Oil: While Stocks Fall, Commodity Bets Are Paying Off,” link here. Pension funds are more likely to invest in commodity futures long term, rather than treat them as quasi-stocks and engage in short selling.

Some politicians still claim that the need for investors to make financial returns on commodities is creating hardships for businesses (like airlines) and people who really need the items at stable prices. Others point to growing worldwide demand from developing countries, and the economic behavior of commodities or business models when they reach “peaks” or “tipping points” which can become unstable suddenly and cause great hardship. But the leveraging (with small margins) of financial instruments magnifies the speed with which businesses and whole facilities for customers could quickly collapse, leading to arguments by some people about “sustainability.”

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