Over the past year, the biggest casualty to emerge as a result of global NIRP (or close to it) monetary policy have been pension funds, which have had two choices: either suffer losses as yields on new fixed income investments barely cover (and in some case don't), or scramble for duration (or outright risky investments like junk bonds and high beta stocks).
In August, we created the chart below as a simplistic illustration of the pension "duration dilemma." The chart graphs how a pension liability grows in a declining interest rate environment versus the value of 5-year and 30-year treasury bonds. As you can see, a $1BN pension that is fully funded at prevailing interest rates would be nearly $700mm underfunded if interest rates declined 300bps and all of their assets were invested in 30-year treasury bonds. The result is obviously even worse if the fund's assets are invested in shorter duration 5-year treasuries.
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Oh I see, because they invested unwisely, the taxpayers get to pay for it again? Isn't that special.
ReplyDeleteHow about this novel idea....Make people contribute to their own retirement funds!!
ReplyDelete7:57 and 9:24. You beat me to it. Defined benefit pensions are a thing of the past. Freeze the account and place a 401k with a 3% matching funds up to a designated amount. It is now time where everyone has to invest in their retirement and future. Same goes for every level of government as well.
ReplyDelete'blame the fed.
ReplyDeleteThere are zero interest rates and the funds can't make it.