We believe most of our readers are at or near retirement, so the following will probably not affect you. But, for those aged 55 and under, it is something to consider and plan accordingly.  If you have a company pension it could pay less than anticipated, so building a portfolio for retirement grows more important daily.

Pension managers must put large amounts into money market investments because each month they need large sums to pay out. Today, through no fault of the pension funds, zero interest rates are beginning to eat into the funds returns.  Roughly 50% ($16t) of all pension funds in the world have money invested in zero interest rates money market funds, with some $2t of this earning a negative return. The other $14t is probably earning between 2 to 5% in long term government and corporate bonds. Unfortunately, this low yield mix is not enough to maintain today’s pensions.

Most funds need other sources of income.  As a result, they are playing the stock market which are trading at, or close to, their all-time highs, based on corporate earnings. Many funds have invested in infrastructure, such as roads and bridges, and in private companies. These are proving to be profitable but are very illiquid and require time and extensive planning to unload.

The future looks poor for pensions. It will take at least another two years before cash pays 7%, a rate of return needed to keep pension funds above water.  We are assuming rates will begin to rise early in 2017.  If they do, it will be 8 years of zero interest rates which has resulted in a steady decline in pension cash reserves. The longer today’s low rates remain, the worse the pension problem will become. It is not only in Canada but includes the U.S., most of Europe, the Far East and Japan.  The August 13th issue of The Economist stated “85% of the nearly 6,000 British pension funds covered by the Pension Protection Fund are in deficit at $530b at the end of July”.  

Today in Canada, 1 year T-Bills yield .52 of 1%, while the 10 year government bonds yield 1%. In the U.S., a 1 year Treasury pays .55 of 1% while the 10 year yields 1.49%. These terrible yields are barely enough to  pay pension management fees.

 

We estimate that next year many pension funds will start to cut monthly pay-outs to individuals. Once one firm begins the cuts many others will quickly follow.  Will governments make up the difference? We doubt it. All governments are more broke than the pension funds they will need to save.