I’ve written in the past about the threat that low market yields and returns pose to pension funds, where managers are setting expectations too high (see here). Now managers face a new threat, the fallout from the Brexit. The Wall Street Journal reports:
The retirement savings of tens of millions of people have come under new threat since the surprise U.K. vote to leave the European Union, thanks to a plunge in global interest rates.
A post-Brexit scramble for safer bonds pulled yields lower and upended global markets just as many public pension funds wrapped up their fiscal year on June 30, eating into any annual gains and widening already-large deficits. Many public pensions that were already having a bad year are expected this month to report their worst annual performances since the last financial crisis in 2008-09.
“We could see some pretty ugly 2016 financial statements,” said Matt Fabian, a partner at research firm Municipal Market Analytics.
A sustained period of rock-bottom rates in the U.S. and negative rates overseas is contorting financial plans for investors and consumers globally, from insurers that rely on bond income to retirees who have to live with lower returns on their certificates of deposit.
Before the vote on Brexit, Federal Reserve Chairwoman Janet Yellen said that the decision would play into the thinking of the FOMC committee’s appropriate path of policy. Lower rates for longer could mean an even tougher time for pension funds going forward.