Young Research & Publishing Inc.

Investment Research Since 1978

Disclosure

  • About Us
    • Contributors
    • Archives
    • The Final Richard C. Young’s Intelligence Report
    • You’ve Read The Last Issue of Intelligence Report, Now What?
    • Dick Young’s Research Key: Anecdotal Evidence Gathering
    • Crisis at Vanguard
  • Investment Analysis
    • Bonds
    • Currencies and Gold
    • Dividend Investing
    • ETFs & Funds
    • Investment Strategy
    • Retirement Investing
    • Stocks
    • The Efficient Frontier
  • Investment Counsel
  • Dynamic Maximizers®
  • Retirement Compounders®
  • Free Email Signup
  • Dick Young’s Safe America

The Costs of A Prolonged Period of Low Rates

February 10, 2020 By Jeremy Jones, CFA

By g0d4ather @ Shutterstock.com

Bloomberg points out here that a decade of ultra-low interest rates is not helping public pension funds. Low rates increase the projected liabilities of pension plans. Low rates also make retirement much more expensive which drives up savings and helps to dampen the intended impact of providing monetary stimulus in the first place. What will pension funds do if the next big bear market occurs before rates are normalized?

A woefully under-reported side effect of perpetually easy money is the impact on the pension industry. We’ve looked at this issue in the past, and unfortunately the news hasn’t gotten any better. With 2019 in the books, the Milliman corporate pension index showed a tasty 15.7% annual return on assets. Unfortunately, funding ratios didn’t improve one iota, as the sharp decline in yields raised the NPV of plan liabilities; in fact, funding ratios even dipped slightly despite the sharp rise in equities.

Great equity returns in 2019 didn’t help pension funding ratios

The news isn’t much better on the public pension side, despite their higher allocation to equities. Milliman estimates that through the middle of last year, public pension funding ratios only increased to 73.4% from the 72.8% reported in mid-2018. That’s only slightly above the funding ratio observed in 2012, when the S&P 500 was less than half of its current price. It’s hard to know exactly what has driven the risk aversion of households in the post-crisis era, but in the context of an aging society it’s certainly possible that there is some sort of Ricardian equivalence at work as individuals anticipate lower retirement investment returns and/or higher taxes moving forward.

Of course, this sort of issue is a relatively low priority for the Fed and indeed other central banks, even though the mathematics of asset-liability matching have encouraged pensions to buy copious amounts of duration almost regardless of the anticipated return. Is it any wonder that global central banks cannot escape the hellscape of low rates and inflation? Perhaps a dose of Fed jawboning may be enough to spur equities higher, or maybe Powell will need to plant a few more magic beans by cutting rates again. Unfortunately, in the pension industry, all those beans are likely to grow is tumbleweeds.

 

Share this:

  • Email
  • Twitter
  • Facebook

You Might Also Like:

  • Higher Rates Help Banks
  • Interest Rates Need to be Higher Pronto
  • “Lower Rates Aren’t Working”
  • Author
  • Recent Posts
Jeremy Jones, CFA
Jeremy Jones, CFA, CFP® is the Director of Research at Young Research & Publishing Inc., and the Chief Investment Officer at Richard C. Young & Co., Ltd. Richard C. Young & Co., Ltd. was ranked #10 in CNBC's 2019 Financial Advisor Top 100. Jeremy is also a contributing editor of youngresearch.com.
Latest posts by Jeremy Jones, CFA (see all)
  • Capital Is Too Cheap - January 26, 2021
  • The Parallels Between Today’s Stock Market and the Dot-Com Bubble - January 25, 2021
  • Corporations Rush to Reap Equity Windfall - January 22, 2021

Search Young Research

Most Popular

  • The Fed is Sacrificing Retirees to Save the Banks
  • Dick Young’s Safe America: Chapter 1, Part I
  • I’ve Been in Richard Young’s Maximizers for Years
  • Vanguard Wellesley (VWINX) vs. Wellington (VWELX): Which Fund is Best?
  • The Highest Yielding S&P 500 Stocks
  • The Power of a Compound Interest Table
  • Whether Through Audacity or Ignorance, Stock Fundamentals Are Being Ignored
  • Jim Simons's Renaissance Technologies vs. Internet Forum Traders
  • Smith Family Robinson in Live Free or Die, NH
  • February RAGE Gauge: Americans Focusing on What's In Front of Them

Don’t Miss

Default Risk Among the Many Concerns with Annuities

Risk and Reward: An Efficient Frontier

How to be a Billionaire: Proven Strategies from the Titans of Wealth

Could this Be the Vanguard GNMA Winning Edge?

Cryptocosm and Life After Google

Warning: Avoid Mutual Fund Year End Distributions

Is Gold a Good Long-term Investment?

How to Invest in Gold

Vanguard Wellington (VWELX): The Original Balanced Fund

What is the Best Gold ETF for Investing and Trading?

Procter & Gamble (PG) Stock: The Only True Dividend King

The Dividend King of the North

You’ll Love This if You’re Dreaming of an Active Retirement Life

RSS The Latest at Richardcyoung.com

  • There is No Such Thing as a Un-Mutated Virus.
  • COVID-9 Side Effects Include Paralysis & Death.
  • Unreported Left Wing Violence Continues
  • You Know “We’ve Been Lied To” and They Laugh at Us
  • The Fundamental Disconnect of “Unity” and the Progressive Left
  • Unmasking Heath and Human Services Secretary Nominee Xavier Becerra
  • Absentee Ballots Not Verified
  • SARS-CoV-2: Probability of Outdoor Airborne Transmission Very Low
  • Your Personal Safety: Concealed-Carry How to Carry Your Freedom
  • Mostly Peaceful, Ungovernable Protestors

About Us

  • About Young Research
  • Archives
  • Contributors

Our Partners

  • Richard C. Young & Co.
  • Richardcyoung.com

Social Media

  • Facebook
  • Twitter
  • Youtube
  • Pinterest

Copyright © 2021 | Terms & Conditions

loading Cancel
Post was not sent - check your email addresses!
Email check failed, please try again
Sorry, your blog cannot share posts by email.