When returns are so meagre, the question of where you invest your money is now less importantby Andy Davis / May 21, 2015 / Leave a comment
The investment world has travelled through the looking glass. Several European central banks have now set rates below zero, meaning that far from earning interest, organisations that park funds with them must pay a small levy. Even some European 10-year government bonds are being issued at negative yields: if you buy at the offer price, the amount you will get back a decade later when the bond matures, including all the interest in the meantime, will still be less than the sum you originally paid. “Curiouser and curiouser” does scant justice to this state of affairs.
Already in Europe, managers of occupational schemes that promise to pay their members a set level of income in retirement are sounding loud alarms. In Switzerland, where interest rates and bond yields are well below zero, there are suggestions that even though the pension system is well funded, large sections of it could nevertheless be bankrupt in a decade if this continues. Similar dire warnings are emanating from Germany, where again life assurers face the same problem: how to pay the incomes they have guaranteed to savers when the returns they can now reliably make are either painfully low or negative.
This is the story of Equitable Life all over again, and something will have to give. For millions of people, including me, who have part of their pension savings in a final salary occupational scheme, these developments should prompt more than a twinge of anxiety.
Given how hard it now is to generate safe and reliable investment income, many of us should count the guaranteed, inflation-linked pension that our employers’ final salary schemes promise to pay us when we retire as our most valuable asset. But how far can we trust that promise? As the returns that scheme managers can reasonably expect continue to shrink, how can they be sure they’ll be able to keep their word? The obvious answer is that they’ll need to pump more money into the fund from somewhere: either by increasing personal contributions (but what about a case like mine, where I’ve left the company and stopped contributing?); or by earning higher returns on their existing portfolio (very tricky in this environment); or by negotiating further injections of cash from the company that stands behind the scheme.
I’m naturally an optimist so, with…