Dropping bond yields are a time bomb waiting to go off for millions of retirement savers, according to new research.
Pension companies are struggling to make the investment returns they need to wipe out deficits because the previously unthinkable scenario of negative yield bonds are hampering their efforts.
Statistics from financial research firm Fitch suggest pension funds are missing investment targets due to $10 trillion of negative yielding bonds costing investors and retirement savers at least 424 trillion each year.
Separate figures from Citibank estimate British and US pension funds have a total black hole of more than $520 billion.
The cost to investors is worked out on bonds returning an average negative yield of -0.24%.
Sleepwalking into a crisis
Researchers argue investors and savers are sleepwalking into the crisis because the bonds were giving yields of 1.23% five years ago and 1.83% going back 10 years.
Central banks in the Eurozone and Japan have negative interest rates for investment and retail banks to discourage them from parking money on their balance sheets.
The intention is to stimulate economic growth by urging banks to lend.
Negative bond yields added to around 1,000 British workplace pensions in trouble should be a major concern for retirement savers.
The BHS pension scheme with 20,000 members has just gone into the government’s Pension Protection Fund, condemning pensioners into a 10% cut in pension income.
The stark truth is millions of workers who thought they had a guaranteed pension income now look forward to financial uncertainty.
Pension prisoners
Businesses are trying to evade their obligations to workers in their pension schemes as deficits are a drag on cash flow as they demand millions of pounds to fill the gaps.
Companies can longer afford to maintain their pension promises because of global financial turmoil and in some cases, poor management.
Pension savers trapped in these schemes become prisoners as once a scheme is under assessment for the PPF, transferring to a personal pension, or a Qualifying Recognised Overseas Pension Scheme (QROPS) in the case of expats, is not allowed.
The Financial Conduct Authority also maintains switching to another pension is unlikely to give a good outcome for someone in a final salary scheme, but these have fallen out of favour and many workers are in direct contribution schemes.
Reduced benefits under the PPF and the option of taking control of retirement cash may well change this.
