Pensions: The Coming Crisis Isn't Just in the United States

The LA Times has a couple articles up about pension issues across the globe. Here are some quotes from a Nov 24th article:

Tens of millions more pensioners and savers around the world are facing the same retirement insecurity, as plunging interest rates since the financial crisis wreak havoc on the funding of schemes. As average life expectancy increases, pensions have become a defining political issue in countries as diverse as Russia, Japan and Brazil.

. . . A common factor in this global pension upheaval has been suppressed bond yields. Bonds have historically provided a simple match for the cash flows needed to be paid out to the members of retirement schemes. But decades of declining bond yields have made it far harder for pension funds to buy an income for their members, pushing them more into equities and other riskier, untraded investments, such as real estate and private equity. 



When it comes to riskier, untraded investments, the article later mentions venture capital. I just wonder which pension funds invested their money in WeWork, Uber and Lyft? I really doubt that they were early investors. To me, the more likely scenario is that pension funds come in at a latter stage of investment. I wonder how many other underperforming unicorns are out there that have taken money from pension funds.

The article also mentions that due to investments in untraded investments, stock market volatility could increase. Since a larger portion of portfolios are being tied up in real estate, private equity and venture funds, a greater percentage of the liquid funds need to be set aside for outflows.

There are a number of other interesting facts here.

First, funding ratio requirements in the Netherlands is 90%. I did a quick Google search and came across this 2017 report from Pew. It states that only 8 states in the US have funding ratios of 90% or higher.

Second, a 1% drop in long-term interest rates means that liabilities increase by 20%, but assets go up by only 10%. So world central banks are really hurting pension plans when they drop interest rates.

I really have to wonder what is going to happen when we have another bear market that lasts for one to two years.

On Dec 5th the LA Times had an article up about French protests. President Macron plans to reform pensions in the country. Protests hit Paris though interesting the article mentions that tens of thousands protested. BBC mentions that 800,000 protested across the country. That doesn't seem like a sizeable number. In Los Angeles, the 2017 Women's March was estimated to have hit 750,000. The French protests weren't just about pensions:

Health workers showed up to decry conditions in hospitals. Students pointed to recent student suicides and demanded government action. Environmentalists emphasized that climate justice and social justice are one and the same. 

AP provides some insights on French pensions. Individuals get about EUR 1,400 per month and can retire at the age of 62 though some get to retire earlier:

Macron wants to replace the current way of doing things with a unified scheme, so that all workers have the same pension rights . . . Macron’s government said some specific measures would be maintained, such as allowing military and police officers and people with physically demanding jobs to retire early.

It'll be interesting about what actually changes.

This also highlights what happens when governments attempt to be too generous. Once there is a realization that government generosity can no longer be sustained, it is very difficult to reduce those benefits.