Plunge in global interest rates threaten public pensions

News


12 Jul, 2016

Plunge in global interest rates threaten public pensions

The retirement savings of tens of millions of people have come under new threat since the surprise UK vote to leave the European Union, thanks to a plunge in global interest rates.

A post-Brexit scramble for safer bonds pulled yields lower and upended global markets just as many public pension funds wrapped up their fiscal year on June 30th, eating into any annual gains and widening already-large deficits. Many public pensions that were already having a bad year are expected this month to report their worst annual performances since the last financial crisis in 2008-09.

A sustained period of rock-bottom rates in the US and negative rates overseas is contorting financial plans for investors and consumers globally, from insurers that rely on bond income to retirees who have to live with lower returns on their certificates of deposit.

For officials who manage retirements of public and private-sector workers, Brexit exacerbated problems that have been roiling pensions around the world for years. The low-rate environment has pulled down returns, inflated funding gaps, encouraged larger investment risks and prompted plan officials to scale back future investment assumptions.

Pensions determine their assets and liabilities through formulas that depend heavily on the fluctuation of interest rates. When those rates fall, investment returns suffer and obligations to future retirees become larger.

While lower rates do boost the value of existing bonds, the negatives outweigh the positives for many funds. Pensions lose money when bonds with bigger payouts purchased years ago mature and are replaced with lower-yielding securities.

See also - Brexit Endangers UK State Pensions