Dangers of Central Banks
In a world plagued by low interest rates—where some countries have even extended their yields into negative territory—pension funds that rely on dependable returns are now in jeopardy.
Analysts and industry experts worry that rock-bottom rates are endangering the beneficiaries of these funds, namely retirees. Many of the world’s biggest pension funds are made up of retirement savings from teachers, firefighters, and other public-sector workers.
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The trillions of dollars in these funds are governed by strict parameters on risk, meaning they are steered towards certain assets. These assets typically have moderate-sized yields, making them perfect for retirement schemes that deliver income on a regular basis. (Source: “Era of Low Interest Rates Hammers Millions of Pensions Around World,” The Wall Street Journal, November 13, 2016.)
Maintaining steady cash flow to senior citizens is a crucial part of keeping the economy moving up and to the right, yet central banks are disrupting that system by persisting with low rates.
Since many of the funds did not anticipate that rates would remain near or below zero for this long, their interest income has been devastated. Some are worried they will not be able to meet their commitments to beneficiaries in the near to medium term, and short-term rates are to blame.
After all, low interest rates only became the fashion after 2008, when the financial crisis ravaged global markets. Central banks went into overdrive, implementing a slate of emergency measures that prevented a total collapse of the economy. Low rates was one of those measures.
They were supposed to be temporary, but eight years have passed and interest rates are lower than ever in Japan and parts of Europe. The two-year German note currently yields -0.6% and the 10-year Japanese government bonds deliver a damp -0.01% return.
Some would argue that the mass retirement of baby boomers is the true problem. It is true that birth rates have fallen over the last few decades, thus creating a scenario where there are fewer current workers for each retiree. Those numbers do indeed strain the solvency of pension funds.
However, the scarcity of yield in today’s markets would certainly exacerbate any structural issues that exist in the pension system. Some analysts even worry that lowering the amount of cash in seniors’ pockets could weaken spending in the economy and ultimately harm the recovery.
