Author Topic: Pensions – The next big financial crisis.  (Read 1573 times)

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The Prophet

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Pensions – The next big financial crisis.
« on: April 23, 2016, 09:47:18 am »
If you thought the last financial crisis was bad wait until the next one.
Next time, it’s going to be about pensions, more accurately the inability to pay pension liabilities and it’s going to be worse, a lot worse.  It will affect everyone globally. There is no cure and no bail-out sticking plasters will be able to "fix" it like last time.

So what is the problem
The world has a liability bubble. Those working today, right now count their pensions as part of their overall wealth. But if many of the pension schemes are put under the microscope, it is obvious that not all these obligations can be paid.

The current value of a pension scheme is arrived at by discounting future cash payments. Because interest rates have fallen and been kept at low levels by central banks for many years, the discount rate has declined meaning that pension liabilities have increased.  This has resulted in many schemes having liabilities that exceed their assets – a pension deficit.

According to Citygroup, in the US the current level of corporate pension deficits are around $425bn. Both UK and European corporate pension plans have similar large deficits. In the public sector it is even worse. Citygroup say The total US public sector pension plans deficit is between $1trn and $3trn.

The shortfall between assets and liabilities is even greater. US corporate pensions assume an annual return of 7.1% but this is impossible to achieve due to the now normal low interest rate environment. Government bonds in most developed economies currently offer tiny or even negative yields.  Assumptions are totally unrealistic as current ten-year US treasury bonds yield less than 2%.
If the realistic discount rates were used liabilities would be much worse.

So what will happen?
When the pension funds can no longer fund the pensions of the retired, they will be closed and the providers forced into bankruptcy. Several US towns and municipalities have declared bankruptcy. The Pension Benefits Guarantee Corporation, a state body that insures American corporate pensions has liabilities twice the size of its assets and will run out of money in the next few years.  Entitlements will have to be cut, taxes raised and public services reduced. Sound familiar?

The IMF warned just last year that the European life insurance industry which also applies discount rates to give the illusion of solvency poses a threat to financial stability.
Unfunded government pensions make corporate pensions deficits seem small by comparison. Citygroup say that OECD countries will have a $78trn in today’s money, TWICE their reported national debt!

All this means less money in tomorrow’s pension pot and the gap in the misguided belief that pension workers think they are getting and the ability to pay these liabilities gets wider.

One thing is for sure, when retirees discover they have been robbed it won't be pretty!


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Re: Pensions – The next big financial crisis.
« Reply #1 on: April 27, 2016, 09:09:10 am »
The UK currently has £1.3trillion in liabilities owed by public sector pension schemes.
of which 93% is unfunded meaning the government is not putting money aside to cover the pensions these schemes will have to pay one day, safe in the knowledge that they will not be in office then.

If the cost of the £1.85trn hidden debt time bomb is added to the published national debt the total debt is a staggering £3.45trn. This works out at around £53,822 each. for every man woman and child in the UK.

It won't be Brexit that the Remain camp's Project Fear claim will harm Britain.
The damage has already been done of many governments by our own elected politicians!
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