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Inflation being fuelled by pension funds’ commodity investments: report

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The speculation in commodity futures by some European pension funds risks making inflation worse, according to research from Dutch non-profit organisation Lighthouse Reports. This also raises questions about whether it constitutes violation of prudent fiduciary practice.

  • Speculation in food and energy commodities markets is contributing to inflation. Lighthouse Reports says European pension funds may be playing a role.
  • The UN Conference on Trade and Development’s (UNCTAD) recommends more stringent regulation of commodities trading markets.
  • UNCTAD believes calming inflation can help avoiding a global recession, protecting some of the most vulnerable people in low-income countries.

Speculation in food and energy futures have raised prices and contributed to inflation, which has pushed many global economies in the current cost of living crisis. The fact that pension funds have been involved in speculating on food and energy futures raises questions about their trustees acting prudently and responsibly, says a new report.

The UNCTAD’s Trade and Development Report 2022 called for stricter regulation of commodities trading markets to combat inflation. It also appeals to the largest economies to consider other options than higher interest rates and austerity measures. The potential contractionary effects of these measures on large economies can have a knock-on negative effect on smaller, trading-partner economies.

These policies could have a devastating effect on poorer countries that are still rebuilding their economies post-COVID, according to the researchers.

European pension fund ‘gambling’ with hard-earned savings

Lighthouse Reports studied the accounts of 70 major European pension funds following a report from the United Nations Development Project (UNDP), which blamed rising prices for causing a cost of living crisis that has pushed an estimated 71 million people in low-income countries into poverty.

Of the 70 pension funds, Lighthouse found 16 currently invest in commodity futures. Of these, the three largest were in the Netherlands, the UK, and Denmark. Many others, however, explicitly forbid speculation in commodities, especially in food.

Does pension fund speculation in derivatives violate the prudent person rule?

Speculation in commodity derivates is not something that is readily associated with pension fund investing. Pension funds are typically managed with a long-term view to mitigate as much risk as possible for their investors. Acting prudently, responsibly and honestly, also known as the prudent person rule, is one of the main fiduciary duties of pension fund trustees.

Speculation by some pension funds, according to Lighthouse Reports, provided good returns. Rabobank pension fund’s annual report revealed that investments in energy and agricultural commodities yielded a 43% return in 2021. 

Similarly, ABP, the Dutch pension fund for government and education staff, saw a 31% return on its investments in 2021, a third of which was invested in food commodities. These were six and four times the average return across all Dutch pension funds. 

Pension funds a major contributor to inflation

In the UK, the University Superannuation Scheme (USS) had £1.5 billion invested in commodity futures. Nest, which manages the savings of 10 million people, had invested over £500 million in commodities derivatives, a quarter of which were food-related.

A Nest spokesperson said: “While our exposure to agriculture commodities provides a useful diversifier for our members, these contracts play a small role in our investment strategy representing a fraction of a percent of our total portfolio”. Rabobank, ABP and USS were also contacted for comment.

The UNCTAD’s Trade and Development Report 2022 stated that excessive speculation in food and energy commodities has fuelled inflation. It cited the role of large financial institutions as creating an imbalance, which has led to price and volume fluctuations, and market volatility. As a group, pensions funds are among the largest institutional investors in the market.

UNCTAD recommends stricter regulations to avoid global disaster

The main recommendations in UNCTAD’s report were around the need for systemic regulation. It called for more transparency and accuracy of data relating to the physical availability of commodities, as knowing the exact amount of food and energy stocks could reduce market reaction to price speculation. 

UNTCAD also called for regulation that holds speculators to account. This would include licensing complex derivates and financial instruments before they are introduced into the market, as well as requiring speculators and market makers of such instruments to disclose their uses and risks.

Fighting inflation is imperative to preventing a global recession, according to the UN agency. Relying on interest rate increases and austerity, however, could have a negative effect on growth in low-income countries, some of which are still rebuilding their economies post-COVID. Many of these countries face some of the worst effects of climate change, and require investment from richer countries to adapt to and mitigate those risks.

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