Low pensions put financial stability at risk

 In CMVM, Money, News, Pensions, Savings, Securities

The impact that Portugal’s low pensions would have on the economy could undermine the country’s financial stability.

This was the warning from the President of Portugal’s securities commission, the CMVM in an interview with the business daily Negócios this week.

Another problem highlighted in the interview with Luís Laginha de Sousa was the need to provide incentives to create savings.

“We can’t interfere in people’s choices and we can’t alter the incentives framework that influences people when weighing up their options between having liquidity or investing in financial products that carry a risk but can provide returns.

“Naturally, we would want to encourage an increase in the stock of savings and that this wealth should be applied to the financial instruments that are available on the capital markets”, he said. (shares and bonds).

Laginha de Sousa says that the CMVM cannot be entirely excluded from this decision-making process since one of its roles is to foster confidence to investors in a regulated market, although it has limitations on advising on the attractiveness and variety of investment instruments.

He does say that it would be desirable for a larger number of Portuguese to invest their savings in the capital markets.

The CMVM boss adds that there are two essential components: the question of the stock of savings and the capacity for these savings to be used to generate more income, typically applied through the capital markets, but says it carries more risk. The other is through tax incentives.

However, given the various risks to financial stability from having liquid savings that generate a low return – and which could be subject to devaluation from an external crisis such as the sovereign debt and pandemic crises over the past decade, and which can result in a fall of income from savings, or a shock from a fall in demand, it would be wiser for savers and investors to apply their money more in capital market instruments, he believes.

But the head of the CMVM warns that any citizen can invest in any part of the world. “This means they have honest, genuine and valid alternatives, but also can be victims to false promises of returns and security that can have deeply negative consequences.

Luís Laginha explains the that prevention is always better than cure in such cases and here the CMVM has a role to reduce such risks and it has a role in educating people to be aware of the risks and the decisions that they take.

Then, within the regulated market, the CMVM’s role is to assure that the players play according to the rules that are defined by the securities regulator and monitor their behavior and act within a logic of prevention and punish them for infractions if necessary.

Third, is to provide investors with a channel through which they can complain and appeal, but adds “unfortunately, often what happens is these cases arise in situations that are outside the regulated market where the CMVM does not legally have a mandate to act.”

In short, people should spread their assets and investing in a regulated capital market can be one way of getting a better return, but should do so in an informed and educated way, being aware of the different levels of risk.