European workers can kiss their retirements goodbye unless they take more risk to keep nest-eggs growing in a world where playing safe can cost you more ever more dearly.
Four years of near-zero official interest rates and successive market panics have driven the returns from low-risk German, British or U.S. government bonds on which pension funds traditionally rely to record lows. That may yet rescue the global economy by supporting borrowing and growth, but it is very bad news for several generations of workers already set to retire later, and for longer, than their predecessors.
Without returns that outstrip inflation – still running at around 2 percent in much of Europe – they face the real value of their savings declining rather than ratcheting up over the next few years. Yet there has been little public discussion of the problem in the rush to try and head off a deepening crisis of poor growth and/or rising public debt in Europe and the United States.
"For governments in Northern Europe and North America, it's about gaining time, avoiding any painful adjustments, keeping interest rates artificially low and hoping things will improve," Nicolas Firzli, Co-Chair of the World Pensions Forum (WPF) said.
Nigel Green, CEO of independent financial advisor DeVere Group, estimates a pre-crisis UK pension pot worth 10,000 pounds a year is now worth 20 percent less, hit by a triple-whammy of money-printing, low interest rates and poor market returns. Many of his clients have been forced to delay retirement as a result, typically extending their working lives by five years.
"People are only just starting to understand how profound an impact these policies are having when it's too late. When they see the figures, they quickly realize they don't have the funds to finish work," Green said. "They are working longer if they have the choice. But some can't, and not everyone wants to employ someone who is older."
In the past, fund managers could move up the yield curve, buying, for example, other AAA-rated euro zone bonds instead of German Bunds to get an extra percentage point or two of return. But the loss of top credit ratings has meant their rules forbid them from investing heavily in many of those countries. That leaves savers with a stark choice: Raise the stakes to retire on time, or stay safe and work longer.
But if funds bet badly on assets they aren't used to owning, they may inflame a problem that has already driven pension funds at major companies like BMW or British Airways into billions of dollars worth of deficit. "There are big deficits but there's no silver bullet," said John Belgrove, a principal at consultant Aon Hewitt, which advises pension funds running more than 10 billion pounds in assets. "Funds cannot afford to suddenly pull out into the outside lane and stick their foot down, they need to have measured approaches for closing that gap," he added.