A UK pension scheme has been branded “deeply irresponsible” after investing in Bitcoin.
The unnamed defined benefit scheme became the first in the UK to take the plunge, using 3% of its assets to buy cryptocurrencies last month.
Pensions specialist Cartwright acted as an advisor to the program and said the allocation was “a strategic move that not only provides diversification, but also leverages an asset class with a unique asymmetric risk/return profile “.
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He said his approach meant the program could benefit from a significant potential bonus while limiting possible negative outcomes.
But some experts appear less enthusiastic about the move, warning that it borders on “gambling with retirees’ futures.”
“It’s a very strange decision. Surely pension funds should be investing for the long term rather than speculating in the short term,” Colin Low, chief executive of Kingsfleet, told Newspage.
“It is ironic that a pension fund, with one of the longest investment horizons, would speculate on its beneficiaries’ assets on something that has no intrinsic value.”
Daniel Wiltshire, actuary at Wiltshire Wealth, added: “This is deeply irresponsible. Pensions trustees have a duty to ensure that scheme assets are managed prudently.
“This prevents taking risks on a basket asset class like crypto. For the sake of members, I hope the regulator pays attention to this.
Why are people so worried?
Bitcoin is the largest and oldest cryptocurrency, although other assets like Ethereum, Tether, and Dogecoin have also gained popularity over the years.
Some investors view cryptocurrency as a “digital alternative” to traditional money – but it is highly volatile, with its price dependent on broader market conditions.
Pension plan administrators generally resist taking big risks with retiree funds.
Advice from the Financial Conduct Authority states that “you should never invest in cryptocurrencies that you cannot afford to lose” and warns people to prepare to lose all their money.
And while a 3% allocation doesn’t seem like much, it’s enough to impact pension fund performance.
This means that if Bitcoin continues to surge, it could provide a significant boost to the system, but also if it sinks, it could have a significant negative impact.
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As a defined pension scheme, this means that the risk is taken by the employer if there are insufficient assets to meet future pension payments, rather than being borne by members.
Laith Khalaf, head of investment analysis at AJ Bell, says many people have bought cryptocurrencies personally, but it’s harder to justify investing in it to diversify a retirement portfolio.
“Although the price of Bitcoin is currently high, we have seen strong performance in the past that quickly gave way to dramatic price drops. This in itself poses a major barrier to consumer and business adoption of Bitcoin as a medium of exchange,” he says.
“If you think Bitcoin is the future of money despite its volatility, consider whether you would be willing to be paid by your employer or billed by your mortgage lender in cryptocurrency.
“It is possible that Bitcoin will prosper and prove its skeptics wrong, but it is also possible that it will eventually become worthless.”
Last week it hit an all-time high above £99,000 – but less than two years ago it fell below $17,000 following the collapse of crypto exchange FTX.
Some experts believe that the potential profits mean that an investment in Bitcoin is a risk worth taking.
Chris Barry, director of Thomas Legal, says an allocation below 5% is “reasonable” and that UK pension funds need to catch up with their US equivalents who have been investing in crypto for years.
“Bitcoin has been the best performing asset class on average over the past 10 years, even beating the NASDAQ. The direction of travel after Trump’s victory in the US elections is indeed very optimistic,” he adds.
David Belle, founder and trader at Fink Money, shares a similar view, saying a retirement plan portfolio is all about numbers trying to generate a return.
“A portfolio is just numbers made up of different betas, of assets that outperform or underperform a benchmark index. Crypto is a good asset class if it fits the risk appetite.