Tuesday, December 27, 2011

Quantitative Easing Tough on Pensions

From the WSJ:
While quantitative easing boosts the value of pension assets, it lowers investment returns and increases estimates of future liabilities. Because typical defined-benefit plans are only 70% funded and face liabilities several years longer than their assets, that leads to wider deficits...But many trustees say the best response would be for the BOE to stop buying long-dated gilts and buy bank bonds instead. Not only would this ease bank funding difficulties, and thereby improve the supply of business loans, it would allow gilt yields to rise.

With interest rates at historic lows, pension funds are in a tough spot. If interest rates rise, they will suffer capital losses and actually be in a tougher spot. I'd say this is good reason to avoid bonds that are attached to entities with large, unfunded pensions (eg, states, munis).

When the government tries to improve prices, it creates winners and losers.

10 comments:

Anonymous said...

You cannot claim they are hurt by both falling AND rising rates unless AFTER the fall they bought a ton more bonds.

Mercury said...

The ultimate losers will be taxpayers. It's hard to imagine a scenario where a state or muni government actually stops putting public employee pension checks in the mail.

Special assessments and taxes will be levied...maybe the state bails out the muni and/or the feds bail out insolvent states. But the gap will be plugged by additional tax revenue one way or the other.

I haven't heard many stories of property taxes declining with real estate values either.

CiG said...

States don't need to stop putting pension checks in the mail, they just need to mark down the amount every year in a subtle enough way that it reduces their liabilities without enough pensioners noticing in time.

And even if pensioners noticed, remind me when a government was last toppled by rioting 75 year olds?

Mercury said...

They won't riot and they won't topple any government. But they will vote to open your wallet.

CiG said...

Why should I (or any working person) stay in a pensioner-dominated state or country?

Younger people are more mobile than the elderly, so I don't think the latter can win. It's always hard for the weak to get a good deal.

CiG said...

Also, re the government "creating" winner and losers, I think it's implying that it wouldn't if it did nothing. Is that true? It seems to me that the government controls (to some extent) the balance between winner and losers. This is also true if it doesn't "touch the dial" and keeps the status quo. Change as such is morally neutral, unless you manage to uninvent the entire apparatus somehow.

Anonymous said...

The elderly are anything but "weak." They're disproportionately likely to turn up on Election Day, so politicians propitiate them at every turn.

Eric Falkenstein said...

I agree the fall in yields has helped pensions, but interestingly, they've already spent that seed-corn....tick, tick, tick

Tel said...

Let me see... we have more baby boomers retiring, a smaller (and less enthusiastic) workforce, rising energy prices, and the Asian nations are gradually closing the technology gap.

I'd say the physical world is set to be tough on pensions, and the economic world is very likely to be unable to sneak around the physical.

Anonymous said...

The fall in yields has clearly hurt pensions who generally own fewer bonds than their liabilities are made of. This is not complicated.