EU's Savings crisis - relevant more than ever
Jul 01, 2019 By Funds Europe
Era of Low Interest Rates Hammers Millions of Pensions Around World,Central-bank moves pull down returns for government-run funds, making it difficult to meet mounting obligations to workers and retiree. Wall street journal link
In the defined benefits plans (where the fixed retirement sum were guaranteed) the growing withdrawals put impossible burden on the organizations. The retirees have to soon realize that what they expect from their pension plans is not necessarily what they will get.
The situation could lead to the revival of traditional family support models (the norm in Asia and developing countries), where the children have to support their elderly parents. In Hungary, there is already a law in place to enforce that the children must support their elderly parents if the pension provisions are insufficient.
Following the global financial crisis, increased regulatory efforts, quantitative easing, and flights-to-safety gave rise to a shortage of high-quality liquid assets (HQLAs) and depressed yields on safe European treasuries. The resulting low interest rates affect both sides of Contractual Savings Institutions (CSIs)’ balance sheet. On the liability side, liability values increased and led to a decline in solvency. On the asset side, as a large part of CSI portfolios is invested in long-term treasuries due to regulatory mandate, falling asset prices and low HQLA yield, cause major concerns for the highly regulated pension funds to meet growing withdrawals as baby boomers retire why contributions are faltering with the growth of the shadow (or sharing) economy.
Visit my finance website and read my German Securities Lending market paper, where we are highlighting major regulatory burden for pension funds and the linked negative welfare effects.