Dutch pension funds are not just suffering from disappointing returns. In Tuesday's Financieele Dagblad anonymous sources claimed that the incompetence of the executive committees of pension funds have increased the problems for some funds. According to Boudewijn de Bruin, Professor of Financial Ethics at the University of Groningen, incompetence could even be the central theme of the financial crisis. ‘It is not the money-grabbing culture that has caused the greatest problems: we have seriously underestimated the danger of incompetence.’
Author: Ralph Aarnout
De Bruin does acknowledge that the financial sector was guilty of feathering its own nest on a large scale. He does not wish to brush this aside. ‘But that should not surprise us. We are all money-grabbers, after all. We all do our utmost to pay as little tax as possible, but if the executive committees of big financial institutions do the same, only on another scale, we are horrified. That is hypocritical.’ De Bruin believes that the true cause of the financial crisis lies elsewhere. ‘My opinion is that we have seriously underestimated the danger of incompetence.’
According to De Bruin, the executive committees of large financial institutions, and certainly of pension funds, lacked ‘epistemic virtues’, the virtues of bringing one’s own knowledge up for discussion and realizing that much in the economy cannot be predicted. ‘Executive committees took great risks without really understanding them. They did not delve deeper into the complicated constructions that were supposed to cover the risks.’ What was worse than the chief executives’ greed, says De Bruin, was their lack of humility and courage. ‘They could not bring themselves to say that they did not understand what they were dealing with. They lacked the courage to ask questions.’
It was not just the executive committees that displayed too little epistemic virtue. De Bruin believes that home buyers who do not understand their own mortgage have also failed morally. But the most important difference is that if home buyers fail it’s their own funeral, whereas if the executive committees of pension funds fail they saddle others with their incompetence. Participation in a pension fund is compulsory for employees, after all; they cannot store their money elsewhere. The incompetence of the executive committee consequently becomes a state responsibility.
The state should take the incompetence of executive committees in the financial sector seriously, says De Bruin. He finds it inconceivable that no knowledge requirements are set for chief executives in the financial sector. ‘Doctors, lawyers and judges are all forced to undergo permanent ongoing training, which is completely justified, of course. But someone who studied economics twenty years ago and has not opened a single textbook since then can, in principle, just become a supervisor or chief executive at a financial institution, where immense risks are taken.’
Anyone who uses a bit of logic has to admit that there are no market forces in the financial sector, says De Bruin. ‘The free market, which the Netherlands Competition Authority (Nederlandse Mededingingsautoriteit; NMA) claims to supervise, does not exist. People cannot choose where they want to park their pension savings, and banks are so big that the state has to cover the risk of their collapse. We live in the illusion of a capitalistic system. Banks and pension funds would be surprised if we really let market forces take effect and really gave savers, insured persons and participants in pension funds a choice.’
Prof. Boudewijn de Bruin (1974) is Professor of Financial Ethics at the Faculty of Economics and Business of the University of Groningen. He was awarded a PhD by the University of Amsterdam for a thesis on game theory and epistemic logic. As well as professor, De Bruin is University Reader in Ethics at the Faculty of Philosophy. In his research on ethics in the financial sector he uses methods from disciplines such as the ethics branch of Philosophy, the game theory branch of Mathematics and Logic.
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