Rock-Bottom Yields Digs Hole for Pensions

It’s going to be hard to reverse the damaging effects of ultralow bond yields on the global economy. 

A glaring example of the longer-lasting ramifications can be found by looking at big American corporate pensions, which were formed to provide retirees with a reliable income. These plans are now facing their worst deficit in 15 years, with enough money to cover just 76 percent of their estimated $2.1 trillion of liabilities, Wells Fargo analyst Boris Rjavinski wrote in a Sept. 9 note.

 So why are they facing such a dire outlook? Because they’ve been piling into longer-term bonds to avoid the volatile swings of stocks. Their bond allocations climbed to about 42 percent of their holdings last year, compared with 29 percent eight years earlier, the Wells Fargo analysts wrote. 

The problem is that longer-term bond yields have dropped to record lows. These pools of bonds are providing a diminishing amount of income at a time when many pensions still rely on 6.5 percent or higher annual returns. The average yield on U.S. 30-year bonds has fallen to 2.4 percent, about one-half the average over the past 15 years. 

DYI Comments:  When it is all said and done economic historians will write how this period of time world wide central banks went galloping off and over the cliff with their sub atomic/negative interest rates destroying the returns for pension plans.  The majority of these pensions will break their promises and have to reduce monthly payments by 25% to 40% to meet obligations.  School teachers, fire fighters, police along with other State and locale employees will bear the brunt here in the States.  Those only with 401k's are being pushed out into riskier and riskier assets since bond yield are so low.  This will not end well and is another reason among many to END THE FED.

DYI