Many in society currently live under the assumption that even if they do not save much throughout their working years, they can rely on their pension pot during retirement. Recent developments however, have flagged up the struggles pension providers currently face. In the US, pensions run by companies in the S&P 1500 index were underfunded by $568 billion by the end of June, an increase of $164 billion in 6 months according to Mercer.
In May 2016 the Central States Pension Fund wrote a letter to the U.S. Treasury Department proposing cuts to the benefits it would pay out to future retirees. It believed it would otherwise run out of money in less than 10 years. The retirement fund represents more than 400,000 workers at 1,500 companies including United Parcel Service and Kroger.
The pension fund, which had its proposals rejected by the Treasury, announced it only has 50% of the money needed to fund future retirement obligations – with $16.8 billion in assets against $35 billion in liabilities. The pension provider, now looking to congress for support, currently suffers from having far more retirees drawing from it than active workers making new contributions, resulting in billions of losses every year. Essentially a greater number of hands are dipping into one rapidly depleting piggy bank.
“There is no time—or reason—to delay. With each passing month, this crisis becomes more difficult—and costly—to solve. For over ten years, we have fought to protect our participants’ hard-earned retirement benefits.” – Central States
Significantly, it appears this is unlikely to be the last letter of such to be sent out by pension providers. Pension funds have been struck by a double whammy – longer life expectancy and falling birth rates. These demographic challenges have been exacerbated by the fact that bond yields across the globe are at record lows, and turning increasingly negative in many safe havens (see our article Negative Interest Rates: Who’s Interested? for more). Pension providers are increasingly powerless to generate adequate returns to pay both current and future retirees.
“We’ve been warning people all along that time is of the essence” – Thomas Nyhan, Central States group’s executive director
Across the Atlantic, BHS is amongst some of the most written about names (including Woolworths, Peacocks and Monarch Airlines) collapsing with huge pension burdens. The U.K. based retailer’s pension fund, which 20,000 members are reliant upon, has a deficit totalling £571 million and still needs addressing. Amongst the 20,000 members, those who are yet to retire are facing a 10% cut under the support of the Pension Protection Fund (PPF).
The PPF is the lifeboat that rescues pension schemes if their corporate sponsors fail. It is soon likely to face its most complicated and biggest operation: the rescue of the £15 billon British Steel Pension Scheme. On Monday, the PPF tightened its rules, which cover the restructuring of companies to protect pension scheme members.
It is clear these pension scheme failures are not one-off events. The action by central banks to spur economic growth since the 2007/08 financial crisis has left pension providers powerless. The Bank of England’s recent move to cut interest rates and drive bond yields lower in the Sterling market only exacerbates the problem. To protect ourselves from major shocks as we plan for retirement, it is becoming increasingly important we build our own birds nest without relying too heavily on, what may amount to be, a far smaller pension pot than we anticipated.