Money, Banking and Risk - Essay Example

Money, Banking and Risk Task: Money, Banking and Risk The governance of pension funds in most countries experiences several challenges. A sizeable number of employees and workers, in most cases, are victims of cases of pension frauds, misleading provision of information or unfair review of high priority pension schemes cases. Cases where private pension firms mismanage pension scheme finances are rampant. Provision of misleading and malicious investment information to employees to withdraw from company pension schemes entails fraud, as well. Stewart and Yermo (2008) note that the various constraints that affect pension funds schemes and systems management are preventable through different strategies. In cases where governments, acting to protect citizens from overexploitation, investigate and discover pensions mis-selling scandal, the firms involved pay compensations. In other instances acting in diverse positions as firms or company management staffs, bear the sole cost of fraud and mishandling of pension funds. A number of cases in the UK and US are in record pertaining to the increasing instances of fraud in pension funds management. The state of New York experienced massive mishandling pension fund during the regime of Mr. Hevesi. Serving as the trustee of the state’s pension, prior to 2009, Mr. Hevesi granted favors to political confidants, family members and business friends an estimated amount of one twenty million dollars, courtesy of his position. In December 2009, the pension scandal that linked the founder of Riverton Holdings emerged as one of the greatest pension miss-selling scandals in the state of New York. According to the Attorney General, Caumo Andrew, Leuschen David consented to pay a sum of twenty million dollars in compensation for the scandal. According to the Attorney General, an amount of thirty million was already in from the private company of Leuschen David. Investigations into the scandal revealed the Leuschen David invested an amount summing to over one hundred thousand dollars in acquired in an illegitimate manner. Mr. Lauschen’s company allegedly had a partnership investment, in coordination with the Carlyle Group, as reported by Leslie Wayne (as cited in DealBook 2009, p. 1). The joint deal, according to the office of the state attorney general, incurred a sum of one hundred and fifty million dollars. All these were because of fraudulent acquisition from the state’s pension scheme. The two-year investigation by the prosecutor and the attorney general’s office confirmed the involvement of other private equity executives. Among these was Markstone Capital Partners. The chairperson of the aforementioned California-based private equity, Elliott Broidy, also conceded to allegations of engagement in the scandal. The private equity firm’s chairperson accepted charges of lawbreaking for involvement in the scandal. The state attorney general commended the two, Carlyle and Riverstone, for their acceptance to compensate the amount lost from the pension scheme in the state. Mr. Cuomo appreciated the move citing it as an example to other people, businesses or private entities that intend to gain from fraudulent deals. State officials would cease mismanagement of pension funds while exploiting their positions in office following the success of the attorney general’s office, according to Mr. Cuomo. The office of the state attorney general also placed charges against other business partners for suspicious transactions involving the said pension scheme scandal. Included in the pension fraud case was Mr. Loglicsi for allegedly acquiring funds illegitimately to produce a movie. Chooch, the movie, allegedly had an estimated cost of one hundred thousand dollars (Gralla 2009, p.1), was far cheaper than the stated amount. Hank Morris, a politician confidant of the perpetrators of the fraud, also faced charges of felony. Mr. Wissman, a close confidant of Mr. Leuschen, faced charges of involvement in the case, as well. The pension protection fund in the United Kingdom experienced a major scandal in March 2012. The scandal involved several private firms offered workers promising transfer rates on for workers to attract investment from their pensions. In the alleged pension scandal, workers received cash bonus from firms in the stock market. In March 2012, there were allegations of pension mis-selling fraud in which there were confusing advice to many workers. Simon Emma, while reporting for the Telegram highlighted the growing concern of a portion of workers deregistering from their salary schemes (Simon 2012, p.1). An estimated fifty-five percent of workers continued to withdraw from the various final schemes of company pensions. The financial services authority predicted a high stake of about twenty billion Euros if workers continue to follow misleading pieces of advice to withdraw from final company pension schemes. The authority maintained the advice as misleading and deliberate. The anxious workers had little justification for their decisions to withdraw from company pension schemes. Most of them withdrew from pension schemes in anticipation of high return on their savings, which remains a speculation and misleading to most of them. An anticipated number of one hundred thousand workers look forward to receiving offers that give cash-up for their investments, instead of pension schemes that do attract little investment returns. The pension minister, Steve Webb, reiterated the high concerns over such misleading directions to workers promising better returns than final company pension scheme. The financial services authority holds the mandate of ensuring that workers make irrational decisions based on clear information offered to them. The provision of unclear and baseless promises to workers, therefore, was tantamount to scandal. The cash incentives promised to workers that prompt them to make decisions based on insufficient information provided. In another pension scandal, Prudential that is one of the most outstanding United Kingdom’s pension providers had to bear the expense of heavy fines for fraudulent conducts. According to the financial services authority, the pension provider paid a total sum of six hundred and fifty thousand Euros in the year 2001. This was as compensation for illegal and improper delays by the pension provider to attend to cases where the concerned parties, investors, were not existent. The investors were dead or retired, according to the financial services authority. The pension provider was guilty of a six-month holdup of several cases that involved calls from investors to receive reviews or filled complaints. A number of such cases were pending and no explanation could satisfy the personal investment authority upon inquiry during their evaluation in 1999 (BBC News 2001, p. 1). The authority confirmed that most of the cases involved serious breach of contracts and fraud. Some of the cases involved the allocation of extraordinary amount of fines to investors, an amount that reflected overexploitation. The authority received limited, if any, records that could serve as justification for most of the decisions made (Steed 2001, p. 1). Prudential had to pay for serious breaches identified by the authority for unfair conduct of pension reviews. There are lessons to learn from the different cases of mis-selling of pension funds that continue to involve a number of pension firms and private companies. A significant number of employees are susceptible to settle for pension schemes that have undesirable and objectionable performance. The efforts by governments to improve retirement savings are at risk of confounding and confusion if prompt decisions are not in place, soonest. In most cases, employers select pension schemes for their employees. This could be a misleading idea since the decision set may be short of full information. Wrong choice of pension schemes for employees may cause serious losses to the employees, whose companies select low profit schemes on their behalf. One of the greatest challenges for employers in choosing pension schemes for their employees is the choice of the most suitable and profitable. Regarding the case of suitability, employers can select schemes that use auto-enrolment (Collyer & Stevens 2012, p. 3). They can subscribe to present pensions schemes since they stand the test of trust among clients. Employees should have a say on their best pension schemes and that in which they express comfort. Workers and employees should specify their preference on the management of their pensions. This would reduce instance of misinformed choice of pension schemes for employees by employers. It also reduces the risk that private firms or employers hold in case of fraudulent deals. Employees joining new companies should have the freedom of continuing with the various pension schemes that are already running for them. Setting up laws that limit the extent of choice that employers have over employees’ pension scheme would be strategic, as well. In most cases, where employers chose pension schemes for their employees, employees have limited involvement in the management of funds (Segars 2005, p. 10). In resolving this, employees should have close engagement in the management of their pension funds. Review of employee pensions is one of the most challenging steps in the management of pensions. The process of review of pensions is prone to influence from parties, individuals and firms, strategizing for malicious gains. Financial advisers have influence in such reviews, as well, in most countries as the UK (BBC News 1998, p. 1). Financial advisers strategize and place stalling tactics on review of pensions. They oppose various review activities while disregarding the welfare of their clients. Unfair decisions on priority cases during pensions review is another great concern. This should act a lesson to government and agencies that protect the employees’ welfare to keep review of pensions an operation conducted with utmost integrity. The personal investment authority, for instance, holds commendable records for ensuring reviews that are of great integrity. It has records of private pension firms and individuals charged for delivering unjustifiable verdicts in their priority cases (BBC News 1998, p.1). In such instances, the firms and individuals are responsible for their actions. Among the main lessons from the instances of pension scandal is the necessity to fill the advice gap that exists in the choice of pension schemes among employees and employers, alike. Unless the concern receives redress, there is a high speculation of increased instances of fraud. There are instances when employees and workers are victims of unintended consequences that emanate from the low level of information available to the employees and employers over the choice of pension schemes. Employees should receive guidance on the available low-cost schemes for them to make informed choices. Some multi-employer schemes have high charges that escalate the cost of the scheme to expensive levels in the long run, for employees. Low-charging multi-employer schemes are best solutions to these consequences that employees may experience from wrong choice because of misinformation. Filling the information gap would be remedy to the consequences of employers choosing existing high-charge existing schemes that are expensive for their employees (InBusiness 2013, p.1). High-charge schemes also attract high exit fees to retain members. Should members exist to low-charge schemes without paying the stipulated fees at a previous high-charge pension schemes, they risk losing their accumulated investments. Most employees already in high-charge schemes, therefore, face discouragement to exit. This reiterates the necessity to give information for informed choices. Publishing a joint code to provide employees with information would greatly help employees to choose pension schemes that suit them most. Schemes with high charges should face disqualification from the list of schemes of auto-enrolment. International monetary system (IMS) is a set of rules and regulations that govern the exchange of currencies among countries at the international level. The system consists of regulations that govern exchange of currencies. According to Goddard (2006, p. 70), IMS consists of a collection of flows of money and the diverse institutions that are responsible for the management of the various funds. It entails the regulation of factors that are responsible for governance of the avenues that support the supplies of currencies. The systems also support the management of agencies that supports exchange of currencies across different world countries. The payment obligations for international payments are under the control of the international monetary systems. The money market funds are part of IMS. Central banks, institutions responsible for international financial affairs and transactions and commercial banks constitute the money market funds. Markets that are open for foreign currencies are part of the IMS, as well. In light of IMS, money is solely a medium to anchor and support the trade of goods and services and not to gain interest. International financial systems, IFS, are groups of institutions that trade in credit creation and distribution. It consists of assets that bear returns and financial markets involved in trade activities. The operation of IFS is dependent on the smooth coordination of the IMS (Buckley 2009, p.14). The IMS and IFS are important in ensuring economic stability at the international level. National economies can only ensure stability in their currencies after placing policies and monetary control mechanisms that protects its local currency. The exchange rates of a nation’s local currency, in relation to other currencies, affect the local economy’s financial stability. International financial institutions strive to ensure an environment that is conducive for international transfer of funds. The World Bank is responsible for ensuring global financial stability and avoidance of crisis. International coordination is achievable through the involvement of IMS and IFS that serve to aid in enhancing international transactions. The international monetary fund is a collective platform for designing IFS. The goal of the IMF is to ensure stability in the exchange rates of currencies among countries (Vreeland 2003, p.88). It also solves issues related to amicable settling of balance of payment issues and promotes trade among countries. It controls the valuation of currencies of many nations. It prevents the effect of currency devaluation with interests of raising the volume of export from a country. It also controls international economic conditions through avenues as conditional lending (Jeanne, Ostry & Zettelmeyer 2008). Central banks serve as the lender of last resort in the various countries and control other commercial banks’ rates of lending. Central banks are responsible for controlling inflation rates and help stabilize the banking system (Eijffinger & Masciandaro 2011, p.5). The provision of liquidity to in the bond markets of different governments is a vital in addressing crisis conditions. Central banks bear the mandate of addressing crisis by providing liquidity in bonds of different governments (Grauwe 2011, p. 3). They hold the central regulatory roles within markets. Wallich (2005) identifies the Fed to hold the greatest role over any crisis in the US banking system. Central banks have absolute control over the operations of the local markets (Schinasi 2003, p. 8). Economic stabilization of markets is a mandate of the central bank. Central banks regulate the exchange rates in local markets. Any detrimental change in the exchange rate is unfavorable to the operations of any country’s economy and the local markets. The central bank, therefore, bears the sole mandate of keeping the exchange rates at check. The interest rates for lending in the local markets provided by commercial banks are within the control of the central banks. In attempts to avoid instances of fluctuations in the economy and local markets, central banks set limits for the interest rates offered by commercial banks. Central banks also set interventions, secret and open, to ensure stabilization on rate in the local markets. Secret interventions adopted by central banks are important since they save local markets from speculations that other foreign markets may have. Central banks also serve the speculative roles of forecasting the state of a country’s economy and local market situations. Through the role of forecasting economic performance of local markets, central banks protect the economy from possible instability. Central banks also serve as an oversight organization to payment systems (Nier 2009, p. 13). 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Collyer, S & Stevens, J 2012, Member Education and Adviser Support Pilot Programme, NOW:Pensions, http://www.nowpensions.com/wp-content/uploads/2012/10/NOW-PENSIONS-LAUNCHES-MEMBER-EDUCATION-AND-ADVISER-SUPPORT-PILOT-PROGRAMME.pdf DealBook 2009, Riverstone to Settle Pension Fund Inquiry, DealBook, 11 June 2009, viewed 14 March 2013. http://dealbook.nytimes.com/2009/06/11/riverstone-to-pay-30-million-in-pension-fund-inquiry/ Eijffinger, S & Masciandaro, D 2011, Handbook of Central Banking, Financial Regulation and Supervision: After the Financial Crisis, Edward Elgar Publishing, Northampton, MA. Goddard, G 2006, International Business: Theory and Practice, M.E. Sharpe, Armonk, NY. 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Schinasi, G 2003, Responsibility of Central Banks for Stability in Financial Markets, International Monetary Fund, New York, NY. Segars, J 2005, Pension Scheme Governance – fit for the 21stCentury?, NAPF Discussion Paper, London. http://www.ecgi.org/codes/documents/napf_discussion_paper_jul2005.pdf Simon, E 2012, A £20bn pension mis-selling scandal?, The Telegram, 4 March 2012, viewed 14 March 2013. http://www.telegraph.co.uk/finance/personalfinance/pensions/9120476/A-20bn-pension-mis-selling-scandal.html Steed, A 2001, Prudential hit with record pension, The Telegram, 30 October 2001 viewed 14 March 2013. http://www.telegraph.co.uk/finance/personalfinance/2739806/Prudential-hit-with-record-pension-fine.html Stewart, F & Yermo, J 2008, "Pension Fund Governance: Challenges and Potential Solutions", OECD Working Papers on Insurance and Private Pensions, No. 18, OECD publishing, Paris. Vreeland, J 2003, The IMF and Economic Development, Cambridge University Press, Cambridge. Wallich, H 2005, Central Banks as Regulators and Lenders of Last Resort in an International Context: A View from the United States, International Banking, pp. 91-102. Read More