Jan-Pieter Jansan, a 77-year-old pensioner from the Netherlands, had high hopes for a carefree pension after saving extensively in a pension during his working life.
But Mr Jansan, a former head of the metal industry, has been forced to re-evaluate his plans after receiving notice from his pension system, one of the Netherlands' largest industrial funds, about plans to cut his pension by up to 10 percent. Of course, the news has hit like a sled.
"This causes me a lot of stress," says Mr. Jansan, who retired 17 years ago and hoped to use his retirement pot to treat his grandchildren and get good hotels on vacation. “The cuts in my pension will mean thousands of euros less that I can spend on the family and the holidays we like. I am very angry that this is happening after I have saved so long. ”
Mr. Jansan is not alone in experiencing pension pain. Tens of millions more pensioners and savers around the world face the same pension security as Jansan when he lowered interest rates since the financial crisis created havoc for the financing of systems. Pensions have become a crucial political issue in countries as diverse as Russia, Japan and Brazil.
General Electric, the US industrial conglomerate, recently announced that it is joining a growing list of companies ending guaranteed "final salary" pension plans, affecting approximately 20,000 of its employees. In the UK, tens of thousands of university graduates are preparing to take strike action over steep increases in their pension contributions.
A common factor in this global pension transformation has been the suppression of bond yields.
Bonds have historically been a simple match for the cash flows that needed to be paid out to members of pension systems such as Jansans. But decades of falling bond yields have made it much more difficult for pension funds to buy income for their members and squeeze them more into equities and other riskier, undisclosed investments, such as real estate and private equity.
Vibrant financial markets have so far secured robust investment gains for pension plans on their existing holdings. Yet, given their long-term debt, the bleak prospects for future profits are causing anxiety.
"Their house is on fire," says Alex Veroude, Chief Investment Officer of the United States at Insight Investment, which manages money for many pension funds. “And prices can and probably will go from here. Even though the house is on fire, it is still only the first floor. We believe it can also hit the second and third floors. "
This is not only a danger to individuals like Jansan who can see their pensions reduced – it can also have a greater impact on the economy. If people set aside more money for retirement, it could hamper economic growth by reducing consumption – contrary to the central banks' intention when lowering interest rates. The Swedish Riksbank hinted at this when it recently signaled that it would raise interest rates back to zero at the end of the year, saying that “if negative nominal interest rates are perceived as a more permanent state, agents' behavior can change and negative effects can occur. ”
It can even have more systemic consequences. Last month, in its annual report on global financial stability, the IMF warned that the rush from pension funds to "illiquid" assets will hamper "the traditional role they play in stabilizing markets during periods of stress," as they will have less money available to scoop up bargain.
Efforts to more unorthodox investment strategies worry some in the industry who are warning that they may exacerbate market declines. "We see really unusual behavior and we will see some repayment," says Con Michalakis, investment manager for Statewide, an Australian pension plan. “The trillion question is when? I have been doing this long enough to not want to predict when it will happen. "
When Christopher Ailman studied for a degree in business administration at the University of California in the late 1970s, Federal Reserve Chairman Paul Volcker raised interest rates and sent bond rates spiraling higher. Shortly after graduating in 1980, the 10-year Treasury return yielded a record of nearly 16 percent – and the notion of return below zero seemed extremely unpleasant.
"At school, my textbooks said there was no such thing as negative interest rates," says Ailman, now investment manager at Calstrs, California's teacher's $ 238 billion pension plan. "But here we are."
In the wake of the financial crisis, many central banks put in place unconventional new tools to revive the global economy when interest rates zero. To begin with, this mainly meant massive, multitrillion-dollar buying programs, but in 2009 Sweden became the first central bank to experiment with negative interest rates.
It was later followed by Japan and the rest of Europe, with the desperate distortion of bonds pushing yields lower. Growing concerns about the health of the global economy, dampened inflation prospects and expectations of even simpler monetary policy have now pushed the pile of negative-yielding debt to more than $ 13 a tonne.
Pension plans invest in a wide range of asset classes, but with many stock markets at or near record highs, the outlook for profits is dampening across the board. AQR Capital Management estimates that the classic 60-40 balanced equity bond fund can return as little as 2.9 percent on average one year after inflation over the next decade, compared with an average of 5 percent since 1900.
"Higher prices simply push forward more and more future returns to the present," says Andrew Sheets, a strategist at Morgan Stanley. "It's good for today's asset owners, especially those close to retirement. It's much less good for anyone trying to save, invest or manage well into the future, which is facing an increasingly scarce return landscape."
Bonds are particularly problematic for "defined benefit" pension plans, which promise members a specific payout, using high-yield bond rates to calculate the value of their future debts, and each downward step deepens their financing challenges.
A reduction in long-term interest rates Percentage will increase debt for a typical pension system by about 20 percent, but the value of their assets would only increase by about 10 percent, according to Ros Altmann, a former UK pension minister. "It is clear that the scheme's funding will deteriorate and employers will to have to increase funding, "he added
Many British pension systems now use sophisticated "responsible investment" strategies, which hedge against the impact of lower interest rates on their debts. This has slowly started to catch on in Europe and the US as well.
But the systems that have not taken measures to protect against interest rate risk are now facing large increases in their deficits and must make difficult decisions on how to bridge the funding gap.
Across the entire western world pension fund managers face similar challenges. The industry outlook is now as bleak as it ever was in Peter Damgaard Jensen's two-decade stint at the top of PKA, a Danish pension fund.
"In some countries, the pension system cannot survive if things do not change," he warns. "They must either pay more or lower benefits."
In the Netherlands, the government has been under pressure to change the rules of the pension system so that systems can effectively reduce deficits, blasted by negative bond yields. Because European bonds gave record lows in August, the funding ratio – a measure of how much money a pension plan has compared to its debts – has collapsed to about 90 percent, according to Anna Grebenchtchikova, a Dutch pension expert. "The 90 percent funding rate means that benefit cuts are likely unless interest rates and / or stock markets rise significantly before the end of the year," she says. "Consequently, many opposition parties and organizations for the elderly have requested a relaxation of the rules."
One such fund is Stichting Pensioenfonds Zorg en Welzijn, the second largest Dutch pension fund. While it generated EUR 39 billion in investment profits in the first nine months of this year, falling returns have forced it to set aside an additional EUR 54 billion to meet current and future demands from pensioners. It now warns that it may need to reduce its benefits for the first time in its half-century history.
"To avoid a reduction, we need urgent help from politicians in The Hague," wrote Peter Borgdorff, PFZW's director, in a blog post earlier this month. "The clock is ticking."
To counter the fading prospects for returns from mainstream bonds and stock markets, many pension plans are ratcheting up their investments in "alternative" or "private" assets, such as private equity, real estate, venture capital, infrastructure and unsecured loans.
For long-term investors who can accept illiquidity in exchange for a promise of higher returns, it makes sense. A housing project or a toll can provide a bond-like, steady income stream. But with almost every institutional investor exploring this path, it has led to foam in "private markets".
"There are certain dangers," says Damgaard Jensen. “It can create bubbles when people enter new areas. They are not the cheapest asset classes to enter. And there are many fees. Often, they are the only ones who become wealthy fund managers. And you have to make sure you can hold on because it's hard to sell. "
These private market investments mean distributing money to private equity or real estate funds, which will be called" when their managers want to make a large acquisition. But this can reduce the amount of money that pension funds have available. The IMF estimates that the pension plans have doubled their appropriations for illiquid assets over the past ten years, and for about one fifth of the funds, these capital commitments amount to more than half of their liquid assets.
"Given higher liquidity risks, pension funds will probably have to allocate more of their liquid assets to cover potential outflows during and after periods of stress, especially if market funding becomes more expensive," the IMF said in its Global Financial Stability Report. making it more difficult for them to buy assets traded at distressed price levels, which limits their ability to invest against business cycles and thus play a stabilizing role during periods of market pressure. "
Prior to a continued subdued outlook for return on investment, fund managers face the unpleasant prospects of inflicting additional pain and requesting greater contributions from pension members and employers, introducing benefit cuts or closing their systems. ] Baroness Altmann considers intervention needed to limit the effects of pension pain spreading to the broader economy, as companies divert cash from investments to pay more money to link to deficits in the pension system.
and their sponsors who may never be able to afford full annuity purchases without becoming insolvent, she says. "The development of a" settlement "scheme rather than a" settlement ", which does not require annuity purchases and which would see pensions being paid out of a pooled asset fund, would be more likely to generate higher pensions overall."  Without intervention, there are also greater risks to society as more workers could be shifted from company-guaranteed guaranteed systems and to arrangements where their pensions are priced in the stock market.
"In 20 years, we can find ourselves in a real global crisis where we have not saved enough money for retirement," says Calstr's Mr. Ailman. for millennials that their parents may need to move back with them. "