The Corner

Markets

Golden Years Ahead? Probably Not

People line up outside a temporary unemployment office at the State Capitol Annex in Frankfort, K.y., June 17, 2020. (Bryan Woolston/Reuters)

It’s a statement of the obvious that savers — many of them retirees — unwilling to be pushed into the stock market, have been badly hit by the ultra-low interest rates that have been the norm since the financial crisis, but their effect on dreams of a comfortable retirement won’t stop there.

The Financial Times:

A decade of historically low interest rates since the financial crisis has put even more pressure on pension systems. This is particularly true for corporate and public sector “defined benefit” pension plans — which promise a certain payment to members….

Moreover, the investment outlook has become more complicated for all types of private and workplace pension plans. Central banks have indicated that savers could face another prolonged period of ultra-low interest rates as they try to foster an economic recovery, while a string of blue-chip companies have been forced to cut their dividends as a result of the crisis….

The crisis is also exacerbating funding challenges for traditional defined benefit retirement plans, which promise to pay a secure, indexed retirement income to hundreds of millions of beneficiaries around the world in the private and public sectors.

The sponsors of these plans take on the investment risk for payment of the pension, and are required to make contributions to plug funding gaps.

Both private and public plans were already feeling pain from the protracted low interest rate environment since the 2008 crisis. Pension liabilities are sensitive to movements in interest rates, and typically inflate when interest rates fall…

Bond investments have historically been the bedrock of most pension funds. But with yields sagging lower for an extended period of time, many fund managers have ventured into riskier corners of financial markets.

“One trend that has been disturbing is that over time many pension funds have adopted riskier and riskier investment strategies to compensate for the secular decline in interest rates,” says Seth Magaziner, general treasurer for Rhode Island state in the US. “That made them vulnerable to shocks.”

What could go wrong?

Read the whole thing, stiff drink, ideally, in hand.

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