The slashing of global interest rates has produced many consequences, not least to the pension fund industry, which is already facing major underfunding issues, as the chart below demonstrates. This issue is not limited to the United States but is a global problem.
The bedrock of pension investment has traditionally been fixed-income products because of their predictable income stream and relatively low risk. Lower interest rates will reduce plan income at a time when demographic forces increase drawers of pensions and reduce the number of contributors.
This problem will grow through the decade. Failing dramatic intervention by plan sponsors and/or governments, many may see a significant reduction in expected pension benefits.
The pension crisis is but one of a host of challenges for the global financial system in the years ahead, which we believe will produce considerable market volatility that will produce both great risks and opportunities.
The onus on all of us, therefore, is to become more engaged “active” investors.
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