Pension Funds Are "Compromising Their Solvency" OECD Warns

Four months ago in “The Global War On Pensioners”, we highlighted the impact perpetually suppressed risk-free rates are having on pension funds. The critical point is this: the lower the investment return assumption (the assumed discount rate), the higher the present value of pension liabilities, meaning funds must either concede that liabilities have ballooned in the low yield environment, or take greater risks to justify elevated investment return assumptions.

This state of affairs has exacerbated an already bad situation for many public sector pension funds in the US and has helped fuel a shift towards “alternatives” by funds determined to maintain investment return assumptions despite the fact that ZIRP and NIRP are making those assumptions more unrealistic by the day. For a detailed recap, see the following:

The Global War On Pensioners
Junk Rated Chicago Has A Billion Dollar Pension Problem
Almost Half Of US States Are Officially Broke
States Turn To Pension Ponzi Scheme To Close Funding Gaps

For more on the risks posed by the intersection of pension funding gaps and persistently low rates, we go to the OECD’s Business and Finance Outlook (first discussed here in the context of bond market liquidity last week):

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