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.
The transfer of responsibility for retirement planning from the state to the individual has left policymakers in Europe and the United States free to prioritize quick economic gain over long-term growth, catching thousands of pension savers in the crossfire.
While cuts in pensions paid to teachers, police and health workers across the indebted euro zone dominate the headlines, many private sector savers have failed to grasp the more subtle link between central bank policy and their dwindling wealth. Lower interest rates earn savers less on their money, while an increase in the currency in circulation promotes inflationary pressures, reducing the purchasing power of that cash over time.
In the meantime, because pensioners are living longer, the gap between the income they need and the total returns generated by the assets in their funds continues to widen.
For pension scheme trustees and members who reject a rapid increase in the risk to their capital, saving more can help mitigate the impact of damaging macro policy. But it is not a failsafe solution for those who planned to take retirement soon.
"If a marathon runner hits the last mile 20 seconds off his target time, he won't be able to make it up. If he found out halfway through, he might have had a chance. It's the same with pensions," Mercer's Senior Investment Consultant Brian Henderson says. "When you get a few years from retirement, it's the assets you already own that generate most of your income, not the money you put in to top things up at the last minute."
Many corporate pension funds are using hedging tools like inflation, longevity and interest rate swaps to improve chances of meeting liabilities even if markets continue to sour. BMW, British Airways and broadcaster ITV have offloaded an aggregate 5 billion pounds of pension risks to insurers and banks via these derivatives since 2010.
On a consumer level, Mark Soper, head of financial planning portal RetireEasy, says savers can wrestle back control of their futures by using a broader mix of methods to shelter wealth like tax-free Independent Savings Accounts (ISAs).
"People who put all their eggs in one defined contribution pension basket are discovering the amount they get out can depend as much on government policy as what they put in. "You thought you had control but the fact is, you don't."
(Additional reporting by Chris Vellacott)